**TABLE 3:  COMPARISON OF TRANSPORT AND INSECURITY AS A CONSTRAINT TO DOING** **<u>BUSINESS</u>**

||**CR **|**ES**|**GUA **|**HON**|**NIC**|**PAN**|
|---|---|---|---|---|---|---|
|**Percent of firms identifying**<br>**transportation as a major constraint**|54.3|32.0|24.6|15.1|23.6|0.6|
|**Percent of firms identifying crime,**<br>**theft and disorder as a major**<br>**constraint**|21.3|51.4|43.8|31.3|48.4|8.2|
|**Proportion of products lost to**|||||||
|**breakage or spoilage during shipping**<br>**to domestic markets (%)**|0.6|1.3|1.3|1.1|2.1|0.1|
|**Products shipped to supply domestic**<br>**markets that were lost due to theft (%**<br>**of product value)**|0.1|1.0|1.1|1.0|0.6|0.5|
|**Security costs (% of annual sales)**|1.4|3.4|1.9|3.8|2.3|1.1|
|**_Source_**_: World Bank Enterprise Surveys 2010_|||||||

This paper utilizes detailed data from a survey of Central American trucking firms to document and investigate road freight costs and pricing on main routes for international trade. The analysis broadly confirms earlier studies (e.g., World Bank 2012) which highlight the role of border frictions, wait times, traffic congestion, high empty backhaul, informal payments, and crime and insecurity in raising costs.<sup>7</sup> At the same time, by providing a more structured econometric analysis this paper quantifies these impacts more precisely, tests the significance of each factor in explaining firms’ costs, and analyzes the impacts of market structure and competition on prices. The data and analysis are restricted to firms serving main trading routes, and therefore cannot speak to these or other issues – including market behavior or road quality – on rural or other domestic routes.

Some of the findings may be surprising. The analysis shows that variations in the quality – i.e., the surface type and condition – of existing roads serving the region’s trade corridors make only a small difference in explaining prices, and only indirectly through travel speeds. In addition, there is no evidence that trucking firms forego profitable opportunities to invest in more advanced truck fleets, either due to credit constraints or other reasons.

Whereas newer, more modern equipment decreases fuel usage costs and vehicle emissions, it also carries additional financing and depreciation costs. Thus, firms with low truck utilization as are prevalent in the region would not find it beneficial to incur these higher fixed costs. Fuel-efficient technologies are available and known in the region; however, under the current market structure financial incentives are weak for many firms to adopt them.

In their totality, cost inefficiencies on main trade routes are substantial. If substantial improvements were possible in each of the significant cost variables (i.e., of 1/3 of their standard deviations), this would lead to a cumulative drop in the average costs of service cost of approximately 2.8 US cents per ton-kilometer. This represents about 16 percent of the mean price.

> 7Although firms’ weighted average travel speeds were not a statistically significant correlate with average firm costs, firms price routes with higher travel speeds lower, presumably due to the greater flexibility this affords for increasing truck utilization.

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