Impediments to regional trade integration

AS WE continue to push the agenda of continental free trade agreement, it is important that we reflect on the challenges that are likely to deter member states from utilising the CFTA. This week’s article covers impediments to regional trade integration. Key obstacles covered here are trade infrastructure, production capacity and non-tariff barriers.

1. Trade infrastructure

In many parts of the world, improvements in transport and communications have facilitated globalisation of production by reducing the cost of breaking up the production chain into components. With increased competition in major markets forcing businesses to adapt to just-in-time production and management systems, flexibility, speed and reliability in delivery of goods have assumed significant importance. Yet, for many African countries, inadequate infrastructure and the lack of necessary institutional, legal and regulatory environments required for efficiency make it difficult to guarantee timely delivery of goods or ensure reliability or flexibility in the supply of goods. Addressing the gaps in Africa’s regional infrastructure links are of particular strategic importance for Intra African trade. These missing links prevent Africa’s transport, power, and ICT networks from functioning as an integrated whole. Until these gaps are closed, Africa will not attain its trade goals. (a) Transport Transportation is probably the most important infrastructure barrier to trade in most African countries. All forms of transportation — road, rail, sea, and air — are generally costly in Africa including feeder roads that will link farmers to markets. High transport costs can isolate markets, reduce economies of scale, and directly raise import and export costs. Low quality transport services reduce profit margins and competitiveness. In the predominantly agricultural economies of sub-Saharan Africa where production is dominated by smallholder farmers, the degree of market development depends critically on the extent to which farm households are integrated into the national economy. Transport problems pose a serious constraint to commercialisation of agriculture in many African countries, limiting the ability to diversify into new export activities, such as horticulture. (b) Roads Studies undertaken by Africa Development Bank shows that the cost of moving goods along Africa’s key trading corridors is exceptionally high, at $100-300 per tonne and the delays exceptionally long (up to 40 days in some cases). This is partly due to inadequate road infrastructure, with important sections of the regional network requiring upgrades of various kinds. Trucking cartels, particularly in West and Central Africa lead to high profit margins and poor service. Congestion at ports, delays at borders, and a range of formal and informal checkpoints greatly hinder the movement of freight and increase transport costs. (c) Ports Africa has some 60 major ports with facilities ranging from conventional berths to container, oil and bulk cargo. Many of Africa’s ports struggle to offer competitive services near to global best practice. Reasons for the inefficiency range from inadequate equipment to complex regulation. Most container terminals are nearing or have reached capacity limits and are under-equipped.

African ports are facing increasing demands for a quick turnaround of vessels from customers with ever increasing sizes of ships. Improving turnaround time by increasing port performance is, however, no easy task, for the main bottleneck is in crane handling.

Global best practice is in excess of 30tonnes/hour, while rates for eastern, southern and western Africa are 8-25 tonnes/hour, 10- 25 tonnes/ hour and 7-15 tonnes/hour respectively. Ports have not made any significant breakthroughs in container handling, even with the arrival of tandem lift and triple lift cranes.

The two main bottlenecks within ports are the loading and unloading of cargo and the customs administration — both need to be addressed simultaneously. Container traffic is also impeded by the lack of an integrated land distribution system, particularly for transit traffic. Many maritime ports struggle to offer competitive services and inland waterways are poorly integrated into transport networks.

Port charges add another dimension to the freight cost problem. Long delays and high port clearing charges affect both import and export containers in many African ports. Africa Development Bank estimates that average dwell times for containers range from 4-8 days in southern Africa to 11-30 days in western Africa, compared to global best practice of less than seven days. Similarly truck processing times are high, 4-24 hours in eastern Africa and 6-24 hours in western Africa, compare to global best practice of one hour. Such delays raise inventory costs substantially. Africa Development Bank studies shows that one extra day at a port costs more than US$35 000 to a shipping line for a 2 200 TEU vessel. The delays also lengthen turnaround times (the time from a buyer’s order to delivery of the product), which can keep exporters from moving into higher-value market segments where shorter turnaround times are important. (d) Railways While many countries and regions rely on railways to move goods, the economic significance of Africa’s railways has declined markedly in the last 30 years. Much of this decline is a result of liberalisation and competition from road transport. Efforts to upgrade Africa’s railways have been hampered by inadequate freight necessary to generate the volumes of traffic and in turn revenue to make them sustainable. (e) Energy Electricity supply is another serious infrastructure problem driving up production costs. Africa’s power infrastructure delivers only a fraction of the service achieved elsewhere in the developing world. Many exporters report that unreliable power supply affects operations. Frequent power outages stop production and drive up operating costs. Many exporters have to rely on generators to deal with the problem of outages at three to five times the cost of electricity from the grid. Dealing with high electricity costs and reliability of supply is thus a priority issue in most countries.

According to the Africa Infrastructure Country Diagnostic (AICD) report, 48 Sub-Saharan African countries (with 800 million people) generate roughly the same power as Spain (with 45 million).

The AICD notes that more than 30 African countries experience power shortages and regular interruptions to service. The underlying causes include failure to bring on new capacity to keep pace with the demands of economic growth, droughts that reduced hydro-power in East Africa, oil price hikes that made it difficult for many West African countries to afford diesel imports, and conflicts that destroyed power infrastructure in fragile states. The AICD report concludes that to meet Africa’s energy needs will require an additional 7 000 MW/ year of new power generation capacity (about half through multi-purpose water storage schemes). (f) ICT The uptake of information and communication technologies (ICTs) in Africa has been hampered by the absence of appropriate regulatory frameworks and the inadequacy of infrastructure. One of the most pressing problems facing firms trying to break into export markets is cost and access to internet, particularly broadband and satellite connections, which are required for high-speed data and optical transmissions. For example, AICD estimates a monthly basket of prepaid mobile telephone services costs $12 in Africa but only $2 in South Asia.

Development of ICT services is also constrained by legal, regulatory, and institutional obstacles. State monopolies frequently tolerate only limited competition in telecommunication services. Internet providers are often subject to restrictions that limit the potential for web hosting services. The basic laws governing communications and broadcasting often limit service offerings, including content controls. Ministries of communications are often both the regulator and an operator.

2. Productive capacity

Firms and farmers are unable to utilise market access opportunities in regional and international markets due to limit capacity to produce. Plants in many African countries operate with considerable excess capacity. Enterprise surveys typically find that firms operate at about 50 percent capacity on average. The reasons for low capacity utilisation vary, but there are some common patterns – problems adjusting to policy changes, shortages of working capital, policy- imposed distortions, and delays in getting inputs because of poor trade-related infrastructure.

Another reason why firms have low productivity is inefficient technologies (production processes, management practices, organisational structures, machinery, seeds and agronomic practices, and so on). Agricultural technology in use is often poor because of insufficient research and because government extension services fail to disseminate available new technologies and complementary inputs widely. UNIDO Global CIP index ranks Sub-Saharan Africa last among the world’s regions for manufacturing value added, with a per capita average of US$ 63 (US$ 29 if South Africa is excluded). This is over 10 times lower than those of Latin America and Asia. The average manufacturing value added per capita in industrialised countries is US$ 4,771 while the global average is US$1 031.

African trade needs to address issues of value addition and de ne areas of specialisation to support improved production. Expansion of productive resources, acquisition of technological capabilities and creation of production linkages will allow African countries to produce an expanding array of goods and services and enable them to better exploit the free trade agreement (FTA) market access opportunities and ensure a beneficial integration into the regional economy on the basis of an internal momentum of growth development.

3. Non-tariff barriers, rules of origin and regulatory policies

Compounding the challenges due to weak physical infrastructure, a web of non-tariff barriers (time delays and hassles involved in trade facilitation services) further constrains private business and trade. Constraints include complex and lengthy procedures regulating private business activity; complex customs arrangements; restrictive rules of origin; and limited regional harmonisation of policies, regulations, and procedures. Poor transit systems and numerous informal roadblocks along trade corridors create additional obstacles. All these contribute to the cost of trading across borders in sub-Saharan Africa which is the highest of all regions according to the World Bank survey of procedural requirements for exporting and importing goods published in Doing Business.