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How to get better grades in logistics

To return to the peak performance year of 2008, Hungarian logistics service providers need to improve in a number of fields.

In a grading system of one to five, there are few things more annoying than getting a three on a test. Unlike a four, which equals a reasonable effort, or a two, which is rather straightforward, a three sends the message that you are neither good enough to excel nor bad enough to fail. The most bugging thing about it is that you know you could have done better.

This, a three (or 2.99 to be precise), is the mark that Hungary got in the World Bank’s global Logistics Performance Index (LPI). The country ranks 52nd on a list of 155, ranking in the same neighborhood as countries such as Panama, Mexico, Vietnam and Greece. Not great company, when it comes to the economy. On a more positive note, a three means that with some effort you can get better, you just need to improve in some areas.

Railway developments

In logistics, this should start at the railway network. In Hungary, a sizable proportion of the rails are in dire need of renovation. The network is in so poor a state that it is nearly impossible to prepare a timetable due to delays caused by technical failures. Today, only 88% of passenger trains run on time as a result of speed restrictions introduced at numerous damaged tracks. Ten years ago, the rate was 96%. Freight trains may not run that fast, but the changes in schedule caused by delays mean they won’t arrive in time either.

This is the field that must improve most, but it won’t happen overnight. Railway renovation is expensive. Building one kilometer of new track costs HUF 320 million (using second-hand raw material, it would be HUF 170 million). This does not include the cost of technical equipment and the renovation of overhead cables. Add these, and the costs would run to HUF 650-700 million/km. Taking this into consideration, even the 200 km/year of renovations planned by the government until 2020 no longer sounds bold. If this project is not started in time, then by 2014, running on schedule will become impossible.

Another disadvantage of rail freight forwarding is the demise of an extensive network: gate-to-gate forwarding is impossible in many instances. Apart from a few lucky companies like BorsodChem or the Diósgyőri Acélművek steel works, which have rail terminals at their premises, the rest have to deal with combined shipping. Yet the major barrier in the way of rail cargo expansion is uncompetitive rail freight rates, according to Koppány Bíró, general secretary of the Hungarian Association of Logistics Service Centers (MLSzKSz). The association is in talks with state railways MÁV and the ministry on working out a more business-friendly system. “We try and achieve a rate that will make carriers  want to travel on the rails.” That is, they are trying to convince MÁV to shave its profit margin and the ministry to support rail cargo more.

In favor of rail freight are a number of EU guidelines that set ambitious CO2 targets for the future. The target value in freight transportation is a 40% drop in emissions between 2008 and 2050. This translates into a target of transferring all road shipments exceeding distances of 300 km to rail or river. The EU’s White Book on transport policy devises several more points to make rail freight more competitive (see table 2). Thankfully, the dates are years down the line, as countries have to put their economies back on track first.

The road less traveled

What damaged tracks are for rail forwarders, volatile fuel prices are for road haulers. In the past 18 months, fuel prices have risen by 30%. For forwarders with pre-fixed rates for a year in advance, this equals disaster. Gergely Ódor, FTL Product Developer at Damco, one of the world’s leading providers of freight forwarding services, could talk a lot about that. Coming from a family of logistics workers (his father was the first captain to steer a shipment from Budapest down the Rhine–Main–Danube Canal), he knows exactly where the soft spots of the industry are.

He is sitting at home with two laptops and two smartphones switched on to keep him busy even on his day off. While talking, his mailbox keeps signaling incoming letters. One is from an important contractor asking him to do something about rising fuel prices. “We have to somehow compensate our haulers,” says the client, “they can no longer make up the difference.”

“This happens on a daily basis,” Ódor notes. Price hikes are painful for everyone, especially for those who won tenders that, in general, require a flat rate. “Some operators think ahead and incorporate a semi-annual compensation for price increases. Others have a multiplier to adjust freight rates,” he notes. Either way, rising fuel prices will make forwarding more expensive. Every 10% increase in fuel prices translates into a 4% freight rate hike. 

And the volume of road freight is forecast to increase. A number of steps, including the phasing out of RoLa subsidies, are pointing in this direction. (RoLa is a combined transport system to transport trucks by rail.) Abolishing RoLa will put 35,000 extra trucks on roads and will take about HUF 2 billion out of MÁV’s pockets, Bíró calculates. But it will also earn the state budget HUF 3.5 billion, which at present takes precedence.

Road toll changes

The debate over rail versus road freight forwarding goes back a long time. From an environmentalist viewpoint it seems more legitimate to favor rail over road. Rail transport is far less harmful to the environment and less exposed to fluctuations in fuel prices. This is the route the EU wishes its member states to follow and which many forwarding associations, including MLSzKSz, are lobbying to improve.

Road transport is undoubtedly the main culprit of air pollution, and right now, most freight transportation within Hungary takes place on the roads. So it is hard for the sector to understand why the government is delaying the introduction of distance-based road fees. Especially since it is expected to bring an additional HUF 60 billion in revenues as opposed to the annual HUF 40 billion earnings from toll fees. The Hungarian Road Haulers Association (MKFE) is also keen to see the new system introduced – the current date set is January 2013 – and used for the right reasons.

“Every country that has implemented this toll incorporated some protectionist elements in the system,” said Gábor Karmos, general secretary of MKFE. In the association’s case, this would mean a proportionate lowering of the vehicle tax, which currently is 40% higher than the EU average. Karmos hopes that the extra sum will only be used in part to fill budget holes (as proposed by the National Economy Ministry) and a significant sum will be spent on the development and maintenance of roads and training. “We often have difficulty finding well-trained drivers,” he admits.

Exchange rate misery

Though not directly linked to logistics, exchange rate fluctuations make the job, and the profitability, of some firms tough. Domestic companies are usually stronger in exports. Export freight rates are also subsidized, which puts import-heavy international carriers at a disadvantage. The rate for a standard 20-foot container under 8 tons from Hamburg to Budapest is €430, while from Budapest to Hamburg it is €375. The real problem for firms is Hungarian customs regulations, which add VAT on top of the goods already levied by a customs duty. Those who can declare their goods at other borders, thus depriving the state of some badly needed income.

Until a year ago, carriers filled their tanks at Slovakian gas station to get cheaper fuel. The introduction of commercial gasoline this January – in which carriers with trucks above 7.5 tons can reclaim HUF 6.5/liter (until October) and HUF 19.50/liter (from November) – seems to have settled this problem, however. “The compensation paid was lower than the income generated from fuel sales,” said Karmos, “so the state came out better off altogether.” With current prices hitting HUF 400 and above, however, there are still many who fuel up outside the country’s borders.

The country’s logistics performance mirrors its general competitiveness, said Attila Chikán, a former economy minister, at MLSzKSz’s annual logistics conference this September. He believes current trends in the economy (and logistics) favor the country, which has untapped potentials in the field, but the lack of a macroeconomic action plan makes it hard to take advantage of these.

The hope is that this shortcoming, along with those above mentioned, will be repaired and Hungary can improve its grades when the next report card is issued.