Opening up logistic services for FDI

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Offline Badshah Mamun

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Opening up logistic services for FDI
« on: December 28, 2014, 10:47:44 PM »
Opening up logistic services for FDI

Logistics refers to a business framework for management of material, service, information and capital flows. It includes the increasingly complex information and communication. On the other hand, it refers to procurement, maintenance, distribution and replacement of personnel and materials. These may be integrated logistic services, international integrated logistic services and cold chain facilities or insulated thermal packaging solution for temperature sensitive products.  It covers a much wider range than simply the mechanisms of shipping and receiving. Logistics balances costs and services in ways that are cost-effective, reflects company goals and provides good customer service. Integrated processes in logistics, optimised customer relations, improved information and control options and technologies such as radio data transmission, pick-by-voice or radio-frequency identification (RFI) help keep costs under control and update information.

The shipping process is a time-definite endeavour that requires collaboration and coordination of multiple parties shippers, freight forwarders, trucking companies, shipping companies, customs, warehousing agents, airport terminals, airlines, and consignees. It is also an information-intensive process involving electronic agents for customs declarations, flight schedules, bookings, tracing cargo status, etc.

An exporter can outsource its logistics functions to logistics service agents, which should be classified according to the type of services that they provide. An agent specialises in the provision of a single logistics service for warehousing and trucking, etc and other logistics support for the entire shipment process (e.g., fourth-party service providers and integrators), typically responsible for management of a shipment in addition to acting as a liaison with other agents for the client.

Forwarders may also act as third-party service providers to provide a range of logistics services. More generally, these third-party logistics service providers are an essential element in managing supply chains.

The term 'logistics services' refers to a supply chain management process that plans, implements and controls efficient and effective flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements. The main services in this area are warehousing, storage and inventory management services, transportation services, freight forwarding or customs clearance and shipping services. There are some other known logistic services which are warehousing, assembly, pick-and-pack, distribution,  order processing, customised label fulfilment, compliance, and reverse logistics.  Almost every critical business activity is a component of logistics. Logistics is a part of nearly every type of organisation, big or small. Merchandising firms, transportation companies, consulting firms and others work along with third-party logistics that offer customised packaging for perishable and non-perishable product.

The logistic service may be from in-house or outsourcing from a third party. The market place for third-party logistics services is perhaps the largest service industry in the world. Import and export goods shipped in and out of the country require extensive third-party logistics planning and management. Because of the complexities of these processes, most businesses choose to hire a third-party logistics provider.

Third-party logistics is a supply chain process that plans, implements and controls efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customer satisfaction and requirements. It involves activities that focus on getting the right quantity and products to the right place at the right time and most importantly, in the current economy at the lowest possible cost. Increasing competitive environment has required organisations to strive for efficiency within the supply chain. Moreover, all the services of an independent service provider can be customised to the needs of the client.

Generally, freight forwarding and clearing of consignments are known as logistic services. These days, third-party logistics companies offer a vast range of shipping services. It is of outmost importance to choose a company that is appropriately fit for specific products, shipping logistic needs and the expertise to save time and money. In some cases, the logistics provider has the capacity to ship millions of packages and thousands of pallets per month to different locations. Choose one that has extensive experience in law and rule, importing and international shipping and is well-versed in all shipping areas with years of experience.

One of the most important aspects of the shipping process is timing. Consignees along the supply chain are dependent on regular shipments of products in order to meet their own customers' needs and expectations. The logistics services' timeline actually begins prior to the shipment date and time, as pre-planned delivery schedules are provided to receivers and their clients so that they will be prepared to accept delivery. A third-party shipping logistics partner can offer better service of shipment on time.

With emerging export of garments and other products, the business of forwarding agent has extended so much that it is no more a forwarding service but a logistic service provider in the global context for efficient services. But the guideline for Shipping Agent License 2009 said shipping agent licenses are not allowed for 100 per cent foreign- owned companies. The present guideline for freight forwarders allows a foreigner to set up a company in Bangladesh with at least Tk 10 million in paid-up capital and $500,000 in security deposits. Governments were inclined to protect local firms to optimise local economic growth, employment, social stability, and tax revenues.

As a result, 'local protectionism,' refers to the role of governments in protecting their own companies against foreign companies, or companies from other regions. On the other hand, the High Court has restricted overseas involvement in freight forwarding business.

Bangladesh is signatory to the General Agreement on Trade in Services (GATS) agreement and can not discriminate domestic and overseas service-providers. This is the national treatment principle (GATS Article XVII), i.e. agreeing not to discriminate de jure or de facto, against foreign services and providers in any way (pre-and post-entry), allowing a balance to be maintained between the pursuit of socially desirable objectives and assurance of the non-discrimination that is necessary to overcome most impediments to market access. However, GATS goes beyond national treatment to target also strictly non-discriminatory measures. While this can secure improved market access, it also limits regulatory freedom. There are two key GATS rules that go beyond national treatment. Moreover, the accession agreement stated that the barriers to market entry to various service sectors need to be eliminated.

The first concerns specific commitments on market access (Article XVI) that overlap with national treatment in excluding discriminatory measures, but preclude also non-discriminatory quantitative measures that constrain the operation of firms. Second, once a member makes specific national treatment and market access commitments, an additional layer of disciplines, particularly on domestic regulation, sets in Article VI.

Technological changes and the demise of natural monopoly arguments for state-provision of major service industries have allowed an increasing number of services markets to be contested internationally through cross-border trade (mode 1 of the GATS) and FDI (mode 3).

Services became a part of the GATS round discussion on the understanding that the countries having restricted to local business should open up the market to gain in other areas, especially in enjoying more market access for their goods in agriculture, textiles and clothing and other areas in which they have comparative advantages and where their exports face tariff and non-tariff barriers.  However, given the actual outcome in textiles and clothing and in agriculture, the developing countries did not get their expected benefits. 

Among the barriers to market access discouraging exports from developing countries from entering the developed countries are  lack of commitments on movement of natural persons (resulting in limits to access to intra-corporate transferees, strict and discretionary visa and licensing requirements and lack of recognition of qualifications), prohibition of foreign access to service markets reserved for domestic suppliers,  price-based measures (discriminatory airline landing fees and port taxes, licensing fees),  subsidies granted in developed countries that have an adverse impact on developing country's exports, technical standards and licensing with restrictive effect,  discriminatory access to information channels and distribution networks,  and practices of mega firms (UNCTAD 1999a: p7).

There is another agreed principle of 'progressive liberalisation' rather than a minimum standard of liberalisation, and Article XIX inscribes 'appropriate flexibility' for individual developing country members for opening up fewer sectors and liberalising fewer types of transactions.  Despite these features of GATS, developing countries in reality face many problems and challenges.

Although in principle developing countries should be able to liberalise their services according to their own chosen pace and sectors, in practice they generally and individually often face pressures to open up. Even if a commitment to liberalise is made on the basis of a 'voluntary offer', once a developing country makes the commitment, it cannot be withdrawn or modified, without giving adequate compensation.  Thus, if a country later finds it has made a mistake in making some of its commitments, or it later decides it would like to develop the capacity of local firms in particular sectors in which it has made commitments, it would face serious difficulties in attempting to modify the relevant commitments. In other words, the commitments in GATS are constraints to policy options in the future. 

The principle of 'progressive liberalisation' also implies that a member is obliged to increase its liberalisation commitments.  Thus, countries are under pressure through new rounds of negotiations to 'roll forward' their liberalisation commitments which are binding, but they are unable to 'roll back' these commitments, except through a willingness to offer adequate compensation.

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) has urged the government to introduce licensing system for freight forwarding agents allowing them to carry out work on documentation of exports. The importers and exporters have to pay phenomenally high prices for getting the documentation works done by the shipping agents. The freight forwarding agents allowed to do the job will reduce the cost significantly. The BGMEA said different chambers and trade bodies, including the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), had long been demanding introduction of licensing system for the freight forwarders.

There are many buyers in the West having global arrangement with logistics companies for handling their imports from packing, internal transportation documentation for better quality to security. These service contracts are also cost effective for overseas buyers and it also benefits the exporting countries.

Bangladesh is now integrated to the global supply chain, particularly for garments products. The freight forwarding is not a simple job of delivering export consignment to shipping companies but a total solution of logistic service of international standard. Local forwarding agents have no such expertise and logistic back-up to cater to the need of overseas buyers. It should amend the registration rules and allow overseas logistic service providers to Foreign Direct investments (FDI) into Bangladesh and also submit an appeal to the High Court for review of the verdict of banning the logistic service providers to extend their services in Bangladesh.

Under GATS agreement, Bangladesh must open up logistic service sector to overseas countries in order to enjoy access to other WTO member markets with our export products. Otherwise, Bangladeshi products will face restriction and become less competitive.  The country should not break the global supply chain allowing uninterrupted flow of products and services. The choice is ours.


Mr. M S Siddiqui
Legal Economist and pursuing PhD
Open University, Malaysia.

« Last Edit: December 28, 2014, 10:49:40 PM by Badshah Mamun »
Md. Abdullah-Al-Mamun (Badshah)
Assistant Director, Daffodil International University