# 1 Introduction

## _1.1 The importance of transport for export competitiveness_

Exports are critical to a country’s development. Exports allow firms to access a larger market to exploit economies of scale; contribute to growth and employment; and generate foreign exchange needed to finance imports. The importance of exports to a country’s growth trajectory means that export competitiveness is often at the center of policy discussions.

In recent years the focus to support trade growth has moved beyond trade policy and market access to embrace “behind‐the‐border” issues as many countries have been unable to compete in global markets despite greater (often preferential) market access. This shift recognizes that a firm’s ability to compete in international markets is the combination of a complex set of demand and supply‐side issues, including macroeconomic policies, factor conditions, infrastructure and related services, transport and logistics, and coordination failures (World Bank, 2012). The transport and logistics sector ‐ which underpins a firm’s ability to access cheap inputs, and to land products in foreign countries at a competitive price – is particularly important given the rise of regional and global value chains. These value chains offer significant growth potential for developing countries, particularly in the context of rising Chinese wages. Sub‐Saharan Africa is expected to be the main beneficiary of up to 85 million manufacturing jobs which may migrate from China in the next generation (Lin, 2011). Exploiting this opportunity depends on the ability to integrate into global value chains. Surveys of developing country suppliers indicate that transportation costs are the single biggest obstacle to entering, establishing or moving up global value chains (OECD‐WTO, 2013).

Developing countries face large trade costs.<sup>3</sup> In 2009, trade costs for low income countries were on average 2.5 times higher than those in high income countries. Although trade costs have been falling globally, the rate of change has been slower in developing countries, which are also starting from a higher base (Arvis et al _,_ 2013). Therefore, the relative position of many developing countries is deteriorating, despite better market access. South Africa is an example of this.

Some transport costs are exogenous: geographical remoteness lies outside the control of a country. Others, such as the provision and efficiency of infrastructure, regulations governing the transport sector (including the level of private sector participation), and regional transport links, lie within a country’s control. These factors can have a significant effect on a firm’s ability to export. Empirical evidence from Sub‐Saharan Africa indicates that reducing exporting costs by 10 percent through improvements in the efficiency of the trade process can increase exports by 4.7 percent (Hoekman and Nicita, 2009). A one day reduction in inland travel times can lead to a 7 percent increase in exports (Freund and Rocha 2010). Similar large gains are estimated to be possible for Latin American countries: a 1 percent reduction in domestic transport costs are estimated to boost manufacturing exports by 3.9 percent in Brazil, 4.2 percent in Chile, nearly 8 percent in Colombia, and 4 percent in Mexico (IDB, 2013). Further, endogenous factors such as maritime transport connectivity and logistics performance can play a similar role to that of geographical distance in determining trade costs (Arvis et al, 2013). This is an important result as it suggests that a large part of a developing county’s ability to compete in the global market relies on policy factors within their governments’ control.

## _1.2 Objectives and structure of this paper_

This paper provides a detailed case study of South Africa’s port and rail network to understand the scope to lower the costs of trade and support improved export access and competitiveness. This is

> 3 The definition used by Arvis et al (2013) is a wider definition than the focus of this paper. It defines trade costs as all variable or endogenous costs which drives a wedge between export and import prices. These are: logistics performance, trade facilitation bottlenecks, international connectivity, tariffs, and non‐tariff measures.

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