Private sector will play key role in AfCFTA industrial development, economic diversification

10th December 2021 By: Schalk Burger - Creamer Media Senior Deputy Editor

The private sector in Africa will play a critical role in speeding up industrial development and economic diversification, particularly in the context of the ongoing pandemic and other development challenges, as part of the African Continental Free Trade Area (AfCFTA), says logistics company Imperial Business Intelligence executive Mark Prommel and Imperial marketing and communications VP Melissa Arjoonan.

The private sector accounts for about 80% of total production, 67% of investment, 75% of credit and employs 90% of the working age population in Africa.

Several determining factors, including an enabling business environment, affordable connectivity, accelerated digitalisation and opportunities to forge strong public-private partnerships are crucial to ensuring businesses’ commitment to trade and investment in the AfCFTA, Prommel and Arnoonan say.

However, African countries imported R8-trillion worth of goods in 2019, only R1-trillion of which came from other African countries.

There are vast distances between markets on the continent, which means that transferring products at different levels of the value chain can be costly. This challenge is further exacerbated by the lack of enabling infrastructure connecting countries, especially rail, which can provide cost-effective transportation.

In 2019, Africa had fewer kilometres of road than it had 30 years prior, and the highest costs of transporting goods in the world. Owing to these logistical challenges, including poor road infrastructure and a lack of rail infrastructure, some companies find it more cost-effective to ship goods from an African country to another continent and then on to another African country.

Given that, to build effective regional value chains, raw materials and intermediate goods may need to move across multiple countries for production and finished goods may be sold in many markets on the continent, costs can build rapidly if transportation between countries is costly and inefficient due to poor transport infrastructure that causes delays. The need to accelerate one-stop border posts on the continent at large is critical, Prommel and Arjoonan note.

"We have seen how conditions-of-entry regulations currently differ from country to country, and this impacts the operations of many businesses across Africa, including delays at certain border posts and ongoing issues along strategic points across corridors.

"Imperial believes technological advancements will play a key role in tackling some of these and other big issues that have prevented trade from growing in Africa, including reducing red tape and easing supply-chain bottlenecks.

"Governments will also need to provide support by building infrastructure because true operational benefits will only be achieved after significant infrastructure investment is made in road, rail and port facilities. In addition, governments have to ensure that regulations do not serve as a constraint," they say.

Further, with Africa’s emerging technological capabilities and the need to invest in infrastructure, digital services and solutions seem to offer the most logical and effective large-scale expansion opportunity. However, this would depend on successful negotiations to keep restrictions on cross-border services to a minimum, as well as investment.

"It is encouraging to note that negotiations are under way with representatives in select countries to open up the service sector, specifically business services, communication, financial services, transport and tourism," they add.

However, from a transport and logistics perspective, Imperial believes last mile delivery is the key to trade. The future of trade depends on full logistics or delivery solutions with minimal restrictions. Excessive bureaucracy can be avoided for transit stocks to landlocked countries, if customs duties are not applicable.

"The AfCFTA does not currently provide any incentive to directly service industries, such as transport, but does open up a larger market. Without customs duty, we expect cross-border transactions by unauthorised traders to reduce and, as the official distribution partner, we can then better service our clients, principals and customers," Prommel and Arjoonan note.

An analysis conducted by the International Trade Forum estimates that the transport sector will experience the greatest boost from AfCFTA, at $286-billion, followed by business services at $207-billion, which are relatively income inelastic and low-skill intensive, albeit to varying degrees depending on the industry.

Further, although pharmaceutical products are currently manufactured in South Africa, Kenya, Morocco and Egypt, Africa currently imports more than 80% of its pharmaceutical and medical consumables, which, under current circumstances, is unsustainable, they highlight.

AfCFTA, once successfully implemented, will address the challenge of small, fragmented markets that have long discouraged pharmaceutical manufacturing investors, Prommel and Arjoonan state.

Meanwhile, the current lack of reliable online payment systems limits cross-border e-commerce and complicated and time consuming payments are compounded by foreign exchange restrictions and controls. In addition, not having payment guarantees means high costs related to debt recovery and write-offs.

"Generally, consumers are concerned about security of payments and the risk of being defrauded, which also contributes to their reluctance to embrace African cross-border e-commerce," they say.

Cross-border trade law enforcement is deemed to be weak, which further negatively affects consumer demand for e-commerce. However, those companies that have developed a good reputation for working in Africa over time, instil confidence in their customers and have thereby enjoyed e-commerce success.

Prommel and Arjoonan note that many of Imperial’s clients and principals, including both multinationals and local companies, are looking at ramping up their manufacturing facilities in selected countries where Imperial will play a pivotal role in getting products to end users across the continent.

"We are excited about the opportunities that the AfCFTA will unlock for the continent and its people, allowing Imperial to further demonstrate our purpose of connecting Africa and the world and improving people’s lives with access to quality products and services," they say.