Road freight reform in emerging markets

In many emerging markets, the performance of the road freight industry is too weak to unleash its full potential in contributing to social and economic development.

While every market has its own specific structure and characteristics, those emerging markets experience comparable shortcomings. More precisely, as identified by IRU and the World Bank in their “Road Freight Transport Services Reform” paper, pervasive service informality due to inefficient regulation, industry atomization, professional skills shortage, or/and obsolete truck fleets, are common features hindering the trucking industry in many countries.

The flourishment of performing markets articulated by players with sufficient investment capacity is especially necessary when the industry faces opportunities brought about by impactful technological developments, such as:

  • The platooning technology, first step towards automation, that can save up to 10% fuel costs
  • The extended use of mega trucks, which increase productivity reducing costs per ton-km by more than 15%
  • The opportunities offered by alternative energy trucks (natural gas, electric) which can reduce energy costs by up to 30%
  • The proliferation of digital marketplaces, which facilitate cheaper truck freights by improving utilization and increasing transparency
  • The efficiencies achieved by algorithms for routes optimization, vehicle and drivers monitoring and tracking, as well as predictive maintenance

In this context, based on our own experience in addressing transport facilitation reforms in emerging markets, we believe that road freight markets can be fostered through a set of guiding principles favoring competition and sustainability, namely:

  • The elimination of quantitative restrictions on transport operations and pricing.
  • The establishment of market access openness, only subject to professional competence and sound financial standing requirements for transport companies.
  • The definition and strict enforcement of regulations concerning transport operations, vehicles and drivers, addressing such key topics as:
    • Professional drivers’ working conditions, contributing to road safety and competition among operators
    • Transport operation requirements adapted to technological developments
    • Vehicle technical features requirements, especially concerning emissions
  • The prevention of anticompetitive practices such as price fixing or market sharing.

The application of the reform guidelines can bring along a certain degree of market consolidation, which favors the emergence of economies of scale and sufficient investment capabilities in fleet, technology, digital solutions, and labor training to sustain competition through a value-added proposal, while maintaining the competitive structure of the market.

Basic regulations should be harmonized among countries within the same region in order to facilitate international trade and transport.

Out of a variety of underperforming market types, we have selected two complex examples:

  • The Brazilian truck fleet increased by 28% in 2010-2014 driven by economic growth and financing incentives, entailing an oversupply of transport offering. While stricter operational laws have been issued ever since (especially concerning driver conditions), insufficient market access requirements and regulatory enforcement have contributed to a lack of structural consolidation. The market is dominated by the informal sector, operating at low quality levels with frequent underpricing and malpractice (overloading), forcing the Government to regulate minimum prices.
  • In Jordan, the fleet is oversized by around 36% following the shutdown of land transport international corridors as a result geopolitical turmoil in the Middle East in recent years. In order to deal with the oversupply of trucks, regulations in place establish severe limitations to the transport production per vehicle (roundtrips to the port of Aqaba, the main gateway to the country, are limited to eight per month). Those measures prevent effective competition and undermine cost competitiveness as the vehicle’s fixed costs are distributed among a small number of trips. In addition, measures seeking to favor industry consolidation and quality, such as truckers’ coalitions, are used in this context as tools for anti-competition practices such as price fixing.

As illustrated by the previous examples, transformative measures to improve market performance need to be tailored to address each market’s specific shortcomings, but should be articulated by the following pillars:

  • Sector Regulation, addressing the necessary changes in the sector’s regulatory and institutional framework concerning competition, market access, operational regulations, market consolidation facilitation, and the enforcement of the regulatory framework.
  • Sector Modernization, addressing the steps required to upgrade and transform the performance and value added by land transport operations concerning fleet renewal and IT systems dissemination.
  • Sector Governance, encompassing the sector’s transformation through an adequate enabling environment that favors the buildup of capacity at the public and private levels, the development of adequate policies, and the capture and leveraging of transport industry data.

About the authors
Juan Rivera holds a MSc. in Mathematics and an MBA and is a Senior Manager at ALG
César Valero holds a MSc. In Civil Engineering and an MBA, and is a Partner at ALG
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