The benefits of intra-regional trade are well documented, yet Africa remains the least integrated continent in the world. Integration would allow for the creation of larger markets to enable players to take advantage of economies of scale, as well as increased competitiveness, specialisation and innovation.
It’s no wonder therefore that increasing intra-African trade is the subject of many of the continent’s initiatives at regional and national level. The African Union’s Agenda 2063 sets as one of its goals the doubling of intra-African trade by 2022. In South Africa, the Trade Invest Africa programme was launched to target the increase in exports to the rest of Africa. Currently, 40% of South Africa’s exports go to Europe and only 25% goes to the rest of Africa.
One of the main reasons for persistently low levels of intra-African trade is due to high costs. There is abundant anecdotal evidence indicating that it is cheaper to import goods from outside the continent than from within it. A big driver of these high costs of doing business within the region is the lack of harmonisation of border controls and regulation. According to studies conducted by the Cross-Border Road Transport Agency, multiple checks on both sides of the borders, varying customs requirements, and differing quality and product standards, all lead to delays and uncertainty for businesses moving goods across Africa’s borders.
Businesses in the United Kingdom (UK) are grappling with similar issues as they weigh up the implications of Brexit. Baker McKenzie’s report, the realities of trade after Brexit, developed in conjunction with Oxford Economics, highlights some of the concerns in the UK, that are also currently faced by businesses operating within Africa. One big issue is “hard borders”, which means goods are exposed to new costs (tariffs and custom duties) each time they cross a border. Non-tariff barriers are also a challenge. These barriers result in a multiplicity of compliance paperwork and other administrative requirements, such as differing licensing and categorisation of products.
Existing customs simplification regimes that are working well and that may provide useful examples for the UK and African countries include the EU border between Norway and Sweden. These two countries have agreed on a one-stop shop for customs paperwork, allowing them to check goods on one another’s behalf. Technological advancements such as scanners for automatic number plate recognition have also helped manage border delays. Further, the United States (US) and some of its neighbours have a “pre-clearance” system in place at certain foreign airports and ports whereby US customs and immigration officers are stationed to enforce US laws for people headed to the US, which then removes the need to go through customs again on arrival.
Some regions in Africa already have similar systems in place. For example, in late October 2017, the Kenya Revenue Authority announced that cargo imports into Kenya would be declared on a centralised tax system in the country. In addition, the East African Community adopted a single customs territory system in 2014 to reduce delays. The South Africa’s Customs Modernisation programme was implemented a few years ago and the new preferred trader programme was introduced in South Africa earlier this year.
There is also a real lack of good quality physical infrastructure in Africa, especially road and rail networks and efficient transport corridors. This adds time and further increases the cost of trade deals. To address this, the Trans Kalahari Corridor (TKC), a road network spanning approximately 1900 kilometres across the Botswana, Namibia and South Africa, was opened in 1998. The Corridor has promoted cross-border trade and traffic as well as economic cooperation between these countries, but other corridors in Africa have been less successful.
In 2016, the Programme for Infrastructure Development in Africa (PIDA) estimated that corridor inefficiencies in the African Regional Transport Infrastructure Network cost over $75 billion per annum and that this was reducing intraregional and international competitiveness in Africa. As such PIDA recommended all Africa’s transport corridors should be converted into smart corridors, which use technology to improve roadway efficiencies, to reduce these costs.
The development and improvement of the physical infrastructure connecting Africa, in all sectors, but particularly in transport, energy and telecommunications, is a necessity for greater African integration. However, implementing cross-border infrastructure projects also has its challenges. The lack of harmonisation of regulatory environments, for instances, can cause lengthy delays.
In a recent case study involving a gas pipeline in West Africa, several areas of regulation needed to be harmonised for the deal to be accomplished. This was addressed by various intergovernmental agreements and the project, from conception to first delivery took some 23 years. It meant the deal was heavily over budget. What was meant to be a $400m project, eventually came in at close to $1bn. The project also struggled to attract private sector financing and had to be funded by the various governments involved, with some support from the World Bank through guarantees.
Clearly regional harmonisation is key to growth in Africa. There is a need for regional bodies, such as the Regional Economic Communities to play a greater role in driving this harmonisation. Establishing regional bodies that have teeth to impose sanctions if national governments don’t adhere to intergovernmental agreements is also important. There should also be a balance between national interest and regional interest. And too many and overlapping regional bodies could lead to regulatory arbitrage in that countries could pick and choose which regulations they want to adhere to.
Other challenges to greater harmonisation in Africa include concerns about surrendering sovereignty – again – an issue flagged by the Brexit debate. Evidence suggests that within a certain region, the larger economies tend to dominate and benefit the most. As an example, South Africa has the most intra-regional trade of the other members in the Southern African Development Community. This means that there might be reluctance on the part of the smaller economies to pursue greater integration. As such, value supply chains within Africa must be created so that smaller economies will also have something to contribute to the whole.
As noted earlier with respect to the West African gas pipeline project, funding regional infrastructure is also a challenge. The private sector is reluctant to get involved in trans-border projects because of the level of complexity and risk (particularly the regulatory risk) so these deals must primarily be funded by Development Finance Institutions (DFIs), Export Credit Agencies (ECAs) and multilaterals. Apart from providing funding, these institutions have a key role to play in de-risking the transaction through their early-stage interventions and helping national governments establish harmonised regulatory frameworks. For example, NEPAD’s Infrastructure Project Preparation Facility funds pre-feasibility aspects of infrastructure transactions.
A truly integrated Africa would mean a growing, thriving continent, with trade flourishing across countries and regions. Harmonising the continent’s regulations, removing barriers to trade and improving its infrastructure links is challenging, but the rewards will be invaluable.
AUTHOR: Frances Okosi, Partner, Banking & Finance Practice, Baker McKenzie Johannesburg