# **Costs and Prices**

In addition to firm and route characteristics and volumes, the survey collected detailed revenue and cost data for the firms’ previously completed financial year. In particular, firms provided data on their total operating costs, the portion of this spent on fuel and lubricant, tires, security, insurance, maintenance, labor costs (wages, salaries, bonuses, and social payments), and other costs, to include licenses, overhead, communication, losses, financial costs, depreciation, and informal payments. We combine these and make adjustments similar to Teravinthorn and Raballand (2009) to depreciation, fuel, and financing costs. 20 21 We then estimate each firm’s ton-kilometers served to produce an estimate of average direct (“accounting”) cost per ton-kilometer (or _ADC_ ) for each firm.<sup>22</sup> As an accounting cost concept, _ADC_ does not measure opportunity costs or the cost of capital, including normal profits.<sup>23</sup> Therefore, a normal markup between _ADC_ and price is to be expected.

The means, medians, and ranges of firms’ _ADC_ are shown by country in Table 12. As shown, although the country means range from 5 to 7 cents per ton-kilometer, cost differentials between low cost firms (minimum average direct costs of 1.8) and high cost firms (with a high of 37 cents per ton-kilometer) are much greater than the mean differences across countries. As a result, only two countries – El Salvador and Honduras – have statistically significant mean costs higher than the lowest cost country (Costa Rica). When the data are weighted using the population weights by country for mono-truck operators versus larger companies, the result is similar. Figure 11 shows the distribution of _ADC_ . While skewed somewhat, the overwhelming majority of firms have costs of less than 8 US cents per ton kilometer.

Table 13 shows the contribution of various factors to costs. As shown, fuel costs are estimated to account for 47 percent of _ADC_ , followed by wages at 17 percent, tires at 8 percent, and other costs, including financing and truck depreciation costs, at 12 percent, maintenance at 7 percent and security at 2.7 percent.

Table 14 shows key firm indicators by size of firm. As shown, costs are highest for mono-truck firms. Markups are highest for companies with between 2 and 20 trucks, whereas the largest companies have the newest fleets, highest utilization rates, and lowest average costs. In addition, although mono-truck 20Estimated financing costs were included for trucks purchased within the past five years as the interest times the purchase price if the purchase was not financed from internal resources. In addition, firms were asked to include financing costs in their total operating costs, which would therefore include interest paid on short term and other credit. To ensure that full depreciation was included, we estimated depreciation using the same methodology used in Teravaninthorn, S. and G. Raballand (2009). The method assumes a logarithmic drop in the truck resale value over time which differs for new versus second hand vehicles so that the residual value of 50 percent is reached after 4 years for new trucks and 5 years for secondhand trucks. The precise formulas are: Depreciation for new vehicles = minimum(logarithm(Years of use / 4 * (exponential(0,5)–1)+1);1). Depreciation of secondhand trucks=minimum(logarithm(Years of use / 5 * (exponential(0,5)–1)+1);1). Finally, we adjusted fuel costs to better reflect costs based on self-reported mileage, kilometers traveled, and local fuel prices.

> 21 Fuel costs in the survey appeared to be understated, so we estimated them from firms’ reported mileage, utilization, and local fuel prices at the time, which per gallon were approximately USD 4.24 in Costa Rica and Panama, 3.85 for Guatemala, 4.25 for El Salvador, 4.28 for Nicaragua, and 4.18 for Honduras.

22It was not possible to cleanly differentiate between vehicle operating cost (VOC) and overhead, or fixed versus variable costs. Because some cost categories, such as labor costs and “other” costs, cannot be broken down into vehicle operating costs, or into variable versus fixed costs, we do not attempt to distinguish between these cost categories, but instead use average total “direct” costs.

> 23 For some firms, because financing cost adjustments were made for financed truck purchases only, _ADC_ may exclude financing costs associated with fixed capital assets such as land or warehouses.

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