Infrastructure and Intra African Trade

I. Introduction This Policy Brief concentrates on assessing the state of transport, communications and energy infrastructure and the regulatory environment, and highlights their impact on intra-African trade. Issues of financing its development and the relevant policy implications and responses are also considered. It further provides key messages and recommendations for intervention to move the infrastructural development agenda in Africa. A symbiosis exists between infrastructure and economic growth. Good infrastructure spurs growth; conversely, increased growth results in a demand for more infrastructures (Eustace and Fay, 2007). Transportation systems play a key role in moving factors of production which are foundational to the cost of trade, the global competitiveness of each country and its development prospects. A better interconnected Africa, internally and with the rest of the world, would create larger markets and facilitate the achievement of the millennium development goals (MDGs) and other internationally agreed upon benchmarks. In this respect, African countries aspire to have a welldeveloped and coordinated, efficient and safe and cost-effective infrastructure. To achieve this, its countries have attempted a coherent programme of activities in energy, transport and communications as well as water and sanitation, in accordance with priorities established in the New Partnership for Africa’s Development (NEPAD) and the mandates of the African Union (AU) and the Regional Economic Communities (RECs) and their relevant technical sector organizations. II. Infrastructure and trade costs

A measure of the efficiency and effectiveness of trade is the cost of doing business. Trade involves transport and other costs, which may account for a sizable proportion of the cost of goods sold. It is not uncommon for transport to account for 20 per cent or more of a product’s total cost. Other expenses, including those covering bureaucracy and red tape, compound transport costs. Poor road infrastructure is responsible for 40 per cent of the transport costs in coastal countries and 60 per cent in landlocked countries. For landlocked countries in particular, transport costs largely accounted for the relatively low average import share in GDP (11 per cent), compared with a 28 per cent average for coastal economies. Transport costs in Africa are recorded to be among the highest in the world. The freight costs differ from region to region in Africa, with Eastern and Southern Africa experiencing higher costs compared with other regions.

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Deficiencies in telecommunications services are another aspect of trade infrastructure that tends to isolate African states from one another. For example, it is much easier for businessmen in Africa to communicate with their counterparts in Europe and North America than with their fellow businessmen on the continent (Yeboah, 1993). Thus, intra-Africa trade is further constrained by the absence of market information due to poor telecommunications. The absence of Information and Communication Technology (ICT) at most African borders adds to the high cost of trade. Recent studies reveal the importance of modern ICTs as determinants of international trade costs. Limao and Venables (2000) examine the impact of ICTs on bilateral trade by including a measure of telecommunications development (the number of main lines) in their indices of infrastructure quality, and find that the latter has a positive impact on trade. François and Manchin (2007) find similar results, except they broaden their measure of infrastructure quality to include the degree of mobile telephone use. These results support the view that communications costs are important components of trade costs. Therefore improvements to infrastructure, including communications, reduce trade costs and consequently increase trade. These studies also demonstrate that expanded use of the internet lowers the cost of trading internationally. It is now much easier------and cheaper------to obtain information on foreign market conditions, product standards and consumer preferences through the internet. This should lower the cost of entering foreign markets and promote trade at the margin. Freund and Weinhold (2004) find that a 10 per cent increase in the number of a country’s Web hosts is associated with an export gain of around 0.2 per cent. The various regional integration programmes in Africa attempt to increase trade among countries through trade liberalization. However, in many cases, formal trade liberalization has not been successful partly because some fundamental aspects of trade logistics, such as infrastructure, have been limited. Trade necessitates additional investments in cross-border transmission links but allows countries to save by tapping lower cost sources of generation. In this sense it is possible to calculate the gains from trade as the rate of return on the additional cross-border investments. The armed conflicts and general instability in many parts of Africa, notably the Great Lakes and Mano River regions, not only destroy existing infrastructure but also prevent their development, thus adding to the constraints on the affected countries. The net impact on trade is that the prices of infrastructure services in Africa are high by global standards. With a number of infrastructure development challenge, including poor and expensive logistics services, particularly countries in sub-Saharan Africa, are among the least competitive in the world. Infrastructure appears to be a major determinant of their global competitiveness.

III. Financing Africa’s infrastructure

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Africa’s demand for transport and energy infrastructure and services are enormous. The public sector alone cannot meet the requirement for several reasons: budgetary constraints reduce public outlays for investment; recent experience with debt problems have spurred African governments to reduce public spending; and Overseas Development Assistance (ODA), traditionally a major contributor to public-sector investment, has declined significantly. In its report in 2005, the Economic Commission for Africa estimated the continent needed at least US$ 20 billion a year investment in infrastructure development until 2015 for it to effectively integrate with the global economy. These are still relatively modest amounts compared with similar investments in some key emerging world economies. For instance, in 2007 Brazil launched a four-year plan, worth US$ 300 billion, to modernize roads, power plants and ports. India plans to spend around US$ 500 billion over the next five years (ICA, 2008). Private sector investment in infrastructure in Africa is skewed towards ICT and, to some extent, the energy sector. In the transport sector, there is a gradual increase in the number of toll-road projects, but these are limited to South Africa. Railways, port and airport concessions are also on the rise. The World Bank estimated the level of private-sector investment in African infrastructure at US$ 21.9 billion in 2006 and 2007 (ICA/ADB, 2008). Public private partnerships (PPPs) are increasingly regarded as essential institutional mechanisms to design, build, operate and finance infrastructure facilities, and several governments are setting up specialist units to promote the use of PPPs in infrastructure development. However, compared with China and India, Africa is not benefiting much from this because of its lack of capacity to develop and implement projects.

The Durban Declaration and Plan of Action (AU, 2007) provides a clear roadmap for the development of an efficient, affordable and safe road transport system. The AU Summit in 2009 endorsed these and identified specific actions to establish a legal framework for monitoring compliance in implementing the programme of action. Its main obligations are to adopt the TAH network as a coordinated plan for the development of highway routes. An intergovernmental agreement on TAH must be developed and ratified and an appropriate institutional framework established as the next step to implementation. IV. Infrastructure and its Impact on Intra- African Trade

a- Rail Infrastructure The share of rail freight in intra-African trade is insignificant------the continent’s rail systems are largely disconnected, with most of them radiating from the interior to the sea ports for external trade. The advantage of rail transport over roads has been highlighted by recent economic and technological trends, including higher energy prices, containerization and increases in the flow of bulk traffic. As a

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result, the policies of the past two decades, which focused only on road transport development in Africa, are being revisited. Further required actions include rehabilitation, interconnection, upgrading and extending railways for transporting bulk freight; developing systematic programmes to replace old locomotives, wagons and communication systems; initiating market-driven and customer-responsive services to attract customers; increasing the role of the private sector; developing competition rules for intermodal transport to gain efficiency in cargo handling; and constructing railway interconnections where feasible.

b- Maritime Ports Although the ports anchor Africa’s imports and exports to the international markets, there is little coastal shipping in Africa. As a result, the impact of maritime ports on intra-African trade is indirect. Africa is still at an early stage in developing its capacity and infrastructure for effective container handling. Considerable potential exists for traffic volumes to increase, thus exerting greater demand for container ports in the region in the near future. Port productivity is generally low. The recent establishment of inland container depots (ICDs) as inland port terminals in coastal or landlocked countries or in distant seaports has made significant impact on container traffic. More ICDs therefore should be developed and the multi-modal interface between the seaports and inland transport systems should be improved to reduce vehicle turnaround and ships’ dwell time. The first AU Conference of Ministers Responsible for Maritime Transport, held in Abuja, Nigeria, in 2007 examined the role of maritime transport in the development of Africa. It adopted the Abuja Declaration for effective revitalization of maritime transport in Africa as a key component of an African socio-economic development policy (AUC, 2007). The next step would be to ensure the implementation of the accompanying plan of action on maritime transport in Africa.

c- Inland Waterways The current levels of trade on Africa’s inland waterways are far below their potential and have little impact on intra-African trade. This is the only mode of transport that has not benefited from AU policy guidelines, partly because no international organization, except IMO, deals directly with such problems. The matter should be raised in future AU meetings of ministers responsible for transport development in the region. Programmes have been initiated by organizations and institutions over the past decade to improve inland water transportation, most notably the various river and lake basin organizations. Each of the large lakes and rivers has set up an intergovernmental basin commission to manage water resources,

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including their use for transportation. The commissions’ effectiveness varies, however, due to their relative capacities. These initiatives would represent a new awareness of the possibilities offered by inland waterways in opening up rural access.

d- Air Transport Air freight plays an increasing role in the competitiveness of goods in world markets for high-value, time-sensitive cargo such as horticultural products. It is particularly important for sparsely populated and landlocked countries and for the future of the region’s tourism potential. In a rapidly urbanizing region with underdeveloped road networks, civil aviation is also important in maintaining connections between cities. Air transport is second only to road transport in African trade. It is estimated to account for about 5 per cent of all trade, but this is mostly international trade outside Africa. Although statistics on intraAfrican air freight are not readily available, the patterns of flights suggest that where such trade exists, it is mainly carried out by the regional airlines. With respect to passenger traffic, the cost of air travel within Africa is generally high, in part due to the relatively short distances, the lack of low-cost carriers and lack of competitiveness. A full implementation of the Yamoussoukro Decision should take place. In addition, all international safety guidelines and standards should be implemented; international airports should be upgraded, including landing strips, aeronautical equipment and airport services facilities; old aircraft should be replaced; ICT use should be increased to facilitate and lower air-transport operation costs; and competition rules and the protection increased. Capacity-building must take place to improve safety by strengthening pilot capability and safety administration.

e-Information and Communications Technology (ICT) Advances in ICT over the past decade have dramatically improved Africa’s participation in the global economy. Its impact permeates all social and economic activities in the information society, where access to information and knowledge is a prerequisite for development (WISS, 2005). ICT provides good prospects for Africa to harness technology, build efficiency, lower costs of production and marketing, develop comparative advantages in other sectors, expand international demand for goods and services, create primary and secondary sources of employment, generate knowledge, and propel research and development. ICT also plays a critical role in promoting trade through various business applications. These include e-commerce; finance, budget and account management; efficient management of transport and logistics services; facilitating customs operations; improving standards and certification; and strengthening regional integration. For instance, e-banking underpins the

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efficient transfer of payments and effective management of liquidity. Locally promising steps already have emerged for money transfers using mobile networks. Achieving universal access to ICT is one of Africa’s major challenges. Wireless and mobile technologies look promising, especially with regard to achieving universal access. In line with the NEPAD strategy, the short-term objectives should be to complete the regional and national lines to provide broadband infrastructure and improve policy and regulatory frameworks to attract private investment. The medium-term objective should be to stimulate demand for ICT networks and services by promoting applications (e-commerce, e-banking, e-government, e-schools, and e-health). The goals of the Connect Africa Summit (Kigali, 2007) provide suitable guidance.

f- Energy Energy contributes to intra-African trade on three levels. Firstly by adding to the production process for goods and services, including powering factories; by providing light and heat; and by supporting the functioning of society. The second aspect is by fueling the transport and communications systems that facilitate trade. Finally, energy resources as commodities also form a major component of trade. As a result, the energy sector is increasingly considered a major factor for regional cooperation and integration in Africa in terms of energy commodity (coal, oil, gas) and electrical power. The integrated development of electricity generation resources and sharing through regional power pooling would promote the development of the continent’s energy resources. Initially the focus will be on finishing power system interconnections at the regional level in the short- to medium-term. This will be followed by completing the regional interconnections in the long-term, thus strengthening the link to Europe and the Middle East. Energy supply and end-use efficiencies still constitute only two-thirds to one-half of what would be considered best practice in the developed world. Therefore, the energy policies must put a greater emphasis on end-use efficiency, the use of renewable resources of energy, where available, and the use of clean technologies, where the incremental cost of such technology will not result in an excessive increase in the cost of energy. Cooperation with developed countries and international institutions regarding energy efficiency will assist African countries develop capabilities and expertise for implementing sustainable least-cost energy development. An appropriate institutional framework will be needed for developing regional treaties in powertrading, harmonizing and enforcing regional regulation, facilitating private-sector investment and developing capacity in power-system operation, maintenance and energy-trading. In many countries rural electrification by means of grids and the intervention of electricity utilities is not the best or fastest means of providing the largest number of households with electricity. It is clear

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that non-renewable sources of energy technologies must play an increasingly important role in the 21st century in fully harnessing Africa’s extensive NRSE potential, and providing clean, affordable and reliable energy is a necessity for sustainable development. Through regional cooperation in the production of cheap energy, cross-border electrification and manufacturing equipment, the cost of supply would be reduced, resulting in the delivery of affordable modern energy to rural communities. In the gas sector, the West African Gas Pipeline (WAGP) supplying gas from Nigeria to Benin, Togo and Ghana should be extended to cover other countries in the region. Similarly, the Trans-Saharan Gas Pipeline (TSGP) between Nigeria and Algeria would interconnect the North and South gas networks and thus enable Nigeria to export its natural gas to the European market through Algeria and also serve countries enroute. Due to the high cost of procuring oil at the individual country level, cooperation is necessary among African countries to integrate procurement and the use of refineries to reduce the cost of oil imports.

V. Finance and IntraIntra- African Trade There has been a significant increase in resources for investment and operations of infrastructure in Africa since 2005, when Infrastructure Consortium for Africa was established. Private-sector investment has especially been significant, amounting to about US$ 20 billion (50 per cent) of commitments in 2007, but mostly concentrated in North Africa and South Africa. PPP arrangements have also increased. However, the global financial crisis which began in 2007 has had serious implications for Africa’s infrastructure. Globally, the level of investment in new projects in 2008 declined by about 40 per cent since 2007 (ICA, 2008). The impact of this crisis on Africa will slow private capital flows into infrastructure development. Africa already spends US$ 40 to US$ 45 billion on average each year on its infrastructure needs. It is estimated that an additional US$ 15 to US$ 20 billion could be captured by staunching losses and improving efficiency (AICD, 2009). But there would still remain a funding gap of more than US$ 30 billion a year. Africa’s response to the crisis will vary from country to country and from sector to sector. A possible response would be to accelerate intraregional trade and therefore investment. Another would be to reduce the cost of doing business by improving the investment climate and strengthening local and regional financial markets. Pension funds, for example, can provide additional long-term capital for domestic investment. Finally, the region could benefit from the vast potential of sovereign wealth funds and the emerging infrastructure bonds and funds. In order to develop infrastructure for effective intra-African and global trade and sustainable development, African countries agreed to, among others, the following strategy (AUC, 2009):

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Deepening regional capital markets to more effectively mobilize local savings and regional financial integration; Improving access to long-term financing by setting up special investment instruments, such as infrastructure bonds, to harness resources for infrastructure investments; Strengthening PPP arrangements by involving the private sector not only in project financing and implementation, but also as stakeholders in policy formulation and enforcing rules and regulations; Continuing to take action to improve the investment climate in African countries for increased private-sector participation by setting up legal, regulatory and institutional reforms; and Undertaking aggressive promotion of Africa as an investment destination, since achieving the right investment climate alone may not necessarily result in increased inflow of investment.

VI. Actions and Recommendations Actions to remedy some of these issues outlined below.


Compliance with intergovernmental agreements. Since the development of regional infrastructure requires cooperation and coordination among the concerned member states, a mechanism must be put in place to ensure compliance. For instance, the various AU declarations can only take effect if and when translated into binding intergovernmental agreements to be signed, ratified and implemented by each participating Member State. And, to ensure implementation, a monitoring and reporting system must be established, including an agreed timeframe and corrective measures. Special funds could be established to assist special needs of some member States (such as post-conflict or fragile states) to implement agreed programmes. The completion of TAH missing links is a good example of this need. This is a test of political will.




Master plans for regional infrastructure development. Master plans are required at the continental (NEPAD/AU), regional (REC) and country levels to facilitate full regional integration, the free movement of people and intra-African trade. PIDA should provide the overall umbrella under which regional and national master plans would be drawn.




Interregional coordination and cooperation. While the RECs form the basic blocs for regional integration, cooperation among the various RECs in infrastructure development provides the ideal basis for achieving continental integration. The cooperation among COMESA, EAC and SADC under the framework of the Tripartite Agreement of 2008 is an

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excellent pilot. Similarly, the interconnectors among the power pools also facilitate regional integration. Countries must consider the benefit realized through integrated regional resource development in their national infrastructure planning and generate cooperative projects. Investment under PPP and financial support from international development partners would require countries to lead with commitments of counterpart funds.




Prioritization of projects. Given the enormity of Africa’s infrastructure needs, projects must be prioritized for implementation. The AU Summit decisions in February 2009 committed countries to implement 15 priority infrastructure projects in energy and transport. One possible approach is for a regional agreement to complete one key project within a given period (say, five years) after which an assessment is made and another key project selected for the following period. Appropriate timelines must be established for agreed action plans to ensure steady progress in implementation. A regular investor forum could be organized around specific regional infrastructure development programmes similar to the North-South Corridor Summit of 2009 held in Lusaka, Zambia.




Project preparation, development and packaging. A key bottleneck to the development of infrastructure projects has emerged as the lack of properly prepared projects that could be marketed for financing and development through PPP or the private sector. As a result it has become necessary to intensify the process of project preparation, development and packaging and feasibility studies to transform them into bankable projects for investment. The progress achieved within a short time following the establishment of NEPAD-IPPF for projects in NEPAD-STAP has demonstrated the effectiveness of such project-preparation facilities.




Institutional development. To accelerate infrastructure development, a comprehensive programme of institutional development and capacity-building at the level of member States, RECs and implementing agencies is required to enable and draw investment. Despite extensive efforts, institutional reform is still not completely achieved in Africa (AICD, 2009). Private-sector participation has been effective in improving service quality and efficiency in some (but not all) areas of infrastructure. Since public provision remains dominant, governance reform in State-owned enterprises deserves attention, with an emphasis on strengthening incentives and accountability. Developing regulatory agencies in Africa also has been challenging, and results are not yet in.

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