3 reasons why logistics is the key to ACFTA’s success
The provisions of the African Continental Free Trade Agreement are now in force after the Gambia became the 22nd African country to ratify the agreement in April 2019. The stage is now set for the formation of the world’s largest trade bloc.
The AU is spearheading the ambitious goal of forming one trading bloc for the continents 54 countries. This will create a massive market of more than 1 billion people and a collective GDP of USD 2.5 trillion. The United Nations Economic Commission for Africa expects that this will boost intra-African trade by more than half by 2022.
This is great news for the continent with the fastest growing population. Nonetheless, a lot of work still needs to be done to realize the vision of free trade on the continent. Negotiations are ongoing to create annexes to ACFTA that will dictate the movement of goods, services and labour within Africa.
Tariffs are not the biggest problem
Although much of the conversation has been focussed on eliminating tariffs and streamlining rules on competition, intellectual property, logistics is actually the biggest barrier to integrating African trade.
In the past 30 years, African countries have made multiple attempts at trade integration. Regional trading blocs such as ECOWAS, EAC, COMESA and SADC were formed for this exact same purpose although with a less ambitious scope. However, results have been inconsistent. In fact, in some instances, trade worsened despite these arrangements. According to a report by the London School of Economics, the amount of trade between some African countries in some of these trading blocs actually regressed!
The extent of implementation of these free trade agreements was questionable. However, logistics costs within Africa still remains the highest in the world. According to research, in some parts of the continent can be as high as 3to 5 times that of developed countries.
Here is why.
A trailer moving from Mombasa port to Kigali Rwanda, 1600 km will take 18 days on the road on average. Over that time the truck will have to stop at tens of roadblocks and get inspected at 2 border points. A similar trip from Rotterdam to Budapest would only take a day.
Moving goods within the African content is often unpredictable and unreliable. Long queues at border posts and cumbersome clearance procedures at ports have seen the time taken to get exports to market to be 50 per cent more than south-east Asia.
Take the example of Kenya. Kenya has made significant strides in improving its competitiveness and ease of doing business ranking 61 globally according to the World Bank. Despite this, it still lags behind in logistics in terms of customs and timeliness. Customs processing delays common and import and export rules are unclear, time-consuming and expensive. Local agencies are also overwhelmed by the volume of cargo coming into the country.
The country’s Logistics performance has dropped from 48 to 64th place worldwide between 2016 and 2018 as a result. According to the World Bank Ease of Doing Business Report, imports take an average of 180 hours to clear customs while exports take 16 hours. The cost of documentary compliance is 10 and 5 times that of OECD countries respectively. The rest of sub-Saharan Africa does not do much better.
Only 34 per cent of Africans has road access according to the AU. Transport infrastructure connecting African countries with each other is wanting. In 1970, the United Nations Economic Council on Africa came up with the idea of building a continent-wide road network to connect its biggest cities and ports. You know it as the Trans-Africa Highway. Only one of the 9 highways conceptualized was ever completed.
Overall, the infrastructure gap has caused logistics cost on the continent to be 50% higher than in Europe or the United States. African countries are increasingly investing in their logistics infrastructure but growth is still slow.
3. Barriers to entry
However, building better roads, getting rid of tariffs and streamlining customs is not enough to fix logistics in Africa. There is still a myriad of systemic issues that plague the logistics sector. Barriers to entry for new players are a good example. Logistics, especially in Africa is a capital intensive business. Regulation and corruption have also slowed down the growth of logistics on the continent.
The existing capacity of local logistics providers is not being fully utilized. Some routes are underserved. Often trucks carry a load that is less than their capacity over long distances. This makes economies of scale difficult to achieve keeping logistics costs high. Something else to note is Africa’s logistics sector is largely informal and fragmented further exacerbating the sector’s inefficiency.
However, technology might prove the key to solving this challenge. Sendy, for instance, takes advantage of the already existing capacity in the logistics sector. The online platform connects fragmented third-party logistics providers with businesses that need to move goods across East Africa. This eliminates the need for large capital investments in logistics by these businesses. It also enables logistics service providers to get more businesses and use their capacity fully.
African countries’ commitment to fully liberalizing trade will be essential if ACFTA is to realize its objectives. However, it will be more interesting to see what arrangements negotiators create to improve connections between African markets. Logistics will be crucial in creating an ecosystem for the potential of African trade to be realized.
Article by Glenn Ogolah