Private sector joins push to raise African incomes through trade

By Helen Castell 08 April 2015

Lamu port in Kenya. Underdeveloped infrastructure, nontariff barriers, slow and uncertain transit times, and some of the highest transport costs in the world remain big challenges toward greater regional trade in East Africa. Photo by: Stanislav Lvovsky / CC BY-NC-ND

Innovative efforts to dismantle trade barriers in East Africa provide a shining example of how the private sector can work alongside governments and nonprofits to help drive sustainable economic growth and lift people out of poverty.

The East African Community has made great steps toward stimulating trade in the region in recent years. Customs union and a common market mean that Burundi, Kenya, Rwanda, Tanzania and Uganda enjoy some of the most liberal trade relations on the continent. The five member states also qualify for duty-free access to the U.S. market under the African Growth and Opportunity Act.

However, underdeveloped infrastructure, nontariff barriers like rules and regulations, slow and uncertain transit times, and some of the highest transport costs in the world remain big challenges.

These have a direct impact on the poor — both as producers and consumers — explained Matt Rees, U.S. Agency for International Development deputy coordinator for Trade Africa.

They limit farmers’ access to agricultural inputs and raise food prices for the poor. Inefficient border operations and uninformed export bans prevent countries with surplus food from trading with neighboring countries that don’t have enough, which contributes to food insecurity.

“Reports indicate that East Africa produces enough food to feed East Africa,” Rees said. “[But] inefficient markets and [nontariff barriers] produce peaks and valleys in the food supply, leading to chronic food shortages and an approximately $1 billion a year requirement for food aid from the U.S. government alone in sub-Saharan Africa.”

East Africa’s major ports — Mombasa in Kenya and Dar es Salaam in Tanzania — need to improve their infrastructure and their efficiency, he argued. More also needs to be done to reduce nontariff barriers and fully implement EAC’s common market and customs union.

“Inefficient ports and poor roads are all bottlenecks for industry, dragging on national economies,” agreed Jens Munch Lund-Nielsen, head of emerging market projects at Maersk Group’s sustainability division.

“When a ship wastes time queueing and loading, or if you have trucks standing idle for hours or sometimes days, its goods are being delayed and that has a domino effect — it will delay payment, delay tax revenues and delay the reinvestment of capital,” he said.

There is also the danger that issues like this dissuade companies from investing in East Africa and creating jobs.

“Despite great improvement in infrastructure in recent years, reaching many rural areas and regional cities remains a challenge,” said Diageo spokeswoman Cecilia Coonan, who also flagged a “logistics gap.” Although this hasn’t stopped the British alcoholic beverages company from investing in Africa, Diageo needs an efficient transport network to ensure products reach its consumers, she noted.

Infrastructure investment and more integration

USAID’s East Africa Trade and Investment Hub and nonprofit partner TradeMark East Africa have already taken strides toward cutting the costs and time associated with regional transport.

Their work has, for example, helped reduce transit times from the port of Mombasa to Kampala and Kigali by an estimated 9 percent over the past 12 months alone, Rees said. Kenya’s government has committed to cutting transit times by an additional 30 percent over the next three years.

TMEA is also on track to complete the construction of 13 one-stop border posts at key border crossings along EAC trade corridors and to double container traffic capacity at the port of Mombasa by 2016, the USAID official said.

One of the key goals of USAID and TMEA is to galvanize private sector companies, whose technological prowess and industry expertise mean they are well-placed to help transform East Africa’s trade and logistics sectors, typically through a mix of financial investment, product development and technological transfer.

Private sector players line up for East Africa LIFT fund

Have an innovative solution to speed up and reduce the cost of trading goods within East Africa? A DfID-backed fund aims to help companies develop new ways of cutting the cost and time involved when trading goods within East Africa.

Private sector engagement in East Africa is key to TMEA meeting its target of creating 5 million jobs over the next five years, CEO Frank Matsaert said, adding that it is already “really engaged” with 400 to 500 companies across the region.

Projects where TMEA has already harnessed private sector power include an SMS system that allows businesses to report nontariff barriers via mobile phones, using software developed by Kenya’s Ushahidi platform.

TMEA is also talking to Maersk about ways it could bring its trading systems together on one “single window” platform that would probably be cloud-based.

That partnership will start with a trial to calculate how much time and money could be saved by digitalizing the documentation associated with a single container of avocadoes en route from a Kenyan farm to consumers in Europe, Maersk’s Lund-Nielsen said.

This process involves more than 30 stakeholders and 300 different interactions, many of which are delayed further by lengthy queues, he noted.

Although Maersk does not yet have the study results, “our immediate sense is that the documentation flow is just as costly as the shipment of the container — it’s probably even more costly,” he said. And in terms of delay, with perishable products in particular, “every day counts.”

Private sector companies can also help governments address trade barriers. Maersk, for example, has access to data and industry insight that can highlight bottlenecks in trade flows as well as help find solutions, Lund-Nielsen said.

Poor logistics are not the only barriers to trade that the EAC is helping overcome. Stronger regulatory integration means companies like GlaxoSmithKline PLC no longer have to painstakingly file product patents individually in each member state. New drugs therefore reach Africans faster, said Allan Pamba, GSK’s vice president for East Africa and African government affairs.

“It no longer takes 20 years to roll out a patent [in Africa],” he said. GSK is, for example, set to launch its latest HIV drug in Africa this year or next — just months after its European launch.

Private sector clout in driving integration

Following GSK’s announcement last year of plans to invest up to 100 million pounds ($147 million) to build up to five new factories in Africa and expand existing ones in Kenya and Nigeria, it received an “avalanche” of requests from African governments wanting GSK to pick their country for one of the plants, Pamba said.

GSK’s priority is that new factories are based in destinations that not only offer attractive economic conditions, but where products manufactured are able to reach a wider market, for example through that country harmonizing its product specification rules with those of neighboring African markets, he said. This “carrot” has incentivized governments to make more efforts in that direction.

Diageo also works closely with nongovernmental organizations, governments, private sector companies and other groups to support trade in Africa. One example is its support of Grow Africa’s work to develop agricultural systems by building strong value chains that benefit smallholder farmers, Diageo’s Coonan said.

It also works with “microdistributors” who are able to reach a wider network of consumers than traditional methods. In Kenya, for example, motorcycle distributors can reach rural areas and communities that would otherwise not be able to access its products.

“This approach enables local entrepreneurs to build their shop or bar business, as well as empowering the local distributors themselves,” she said.

WTO and beyond

As Africa prepares to host its first World Trade Organization ministerial meeting in December in Nairobi, TMEA is exploring ways it can “piggyback” interest in the event to highlight investment opportunities in East African trade and logistics.

One initiative will be a private sector summit that TMEA hopes to run alongside the meeting.

“The WTO ministerial is about magnifying the African voice in trade talks,” Matsaert said. “It’s really significant.”

Private sector companies are “really thinking about creating a compact — something beyond a compact that’s just there on paper, but will actually get real things done like job creation.”

Pamba plans to attend the meeting on behalf of GSK.

“We want to be at the table with everyone else, and bring others along, especially smaller and midlevel companies that are very common across the region,” he said.

Jobs and opportunities

While foreign aid has been beneficial to East Africa, trade creates employment, which in turn “gives people opportunities to provide for themselves,” Pamba said. It is “a way of helping [Africa] drive its way out of poverty, emancipate itself in many ways, and bring peace in many of these countries.”

Trade gives governments a solid tax base which, if used responsibly, drives social investment — for example roads, hospitals and schools. Raising living standards and employment opportunities can also help cut crime, he argued.

Every $1 invested so far through TMEA has yielded a $34 return, and much of this directly improves the lives of ordinary East Africans, Matsaert said.

Through its work with the Burundi Revenue Authority, for example, TMEA has helped the government double its tax revenue. This has given another 40,000 Burundians access to health care.

TMEA also works directly with informal traders, many of them women, improving their safety at borders and making them more aware of their rights.

USAID’s work on the EAC Simplified Certificate of Origin — an easy-to-use customs clearance document — has meanwhile helped small traders, mostly women, enter the formal trading sector. As well as saving them time and money, the SCO frees them from the risks of using traditional informal routes, Rees said.

TMEA does “direct poverty work” as well, targeting regional value chains — for example coffee farming — in which the poor are big stakeholders, Matsaert said.

“A lot of the work we’re doing is at grassroots level,” he noted. “It’s not just trickle down — it’s trickle up.”

Sectors that can benefit from AGOA

Agriculture is indeed one sector where the benefits of freer trade and faster, smarter, cheaper transport can reap big rewards for low-income communities. Farming provides livelihoods for the bulk of the region’s population and is critical to stamping out chronic food shortages. Improving regional trade in food staples improves food security, reduces price volatility and raises farmers’ incomes.

Other sectors in which East Africa has potential to competitively export under AGOA — and create income opportunities for the poor — include textiles, apparel, leather goods and floriculture, Rees explained.

Companies that have thrived under AGOA include Mombasa Apparel, which has so far met six U.S. buyers through the East Africa Trade and Investment Hub. By the end of 2015, the company will employ 14,000 Kenyans in the coastal region, “positively impacting the livelihoods of nearly 100,000 Kenyans,” he said.

Infrastructure investments also can have a massive impact on African economies, with tangible benefits for local businesses and the workers they employ, Lund-Nielsen said.

This can be illustrated by the Apapa Container Terminal, which Maersk unit APM Terminals took over in 2006. At that time, “the challenges were daunting — everything was rundown and trees were literally growing up through the equipment,” he said.

Due to the port’s inefficiency, ships had to wait an average 28 days when loading in Nigeria. Within three years of APM’s investment, this had been reduced to one day — a move that released $200 million into the local economy and created at least 30,000 jobs among the 20,000 local businesses that depend on the port for their services, he said.

Logistical innovations, such as using refrigerated “reefer” containers, are also improving livelihoods by extending the lives of perishable products such as flowers or fruits that are currently exported mostly by plane, Lund-Nielsen said.

In the case of Kenya’s avocado export industry, where Maersk is also training growers to pack their goods to international standards, this means such products can be transported by ship at a lower cost — a development that enables Africa’s mostly smallholder farmers to reach new markets in Europe at a competitive price, he said.

Trade liberalization and the integration of low-income countries into free trade pacts has helped lift millions of people above the poverty line over the past 20 years, Lund-Nielsen concluded.

This comes with a caveat, however.

“Trade is not a silver bullet,” he noted. “There’s no guarantee of socially inclusive growth, just because of trade. The gains from trade depend on how evenly it is distributed within a country.”

That is the litmus test against which efforts will ultimately be judged.

What are your thoughts on the private sector’s role in global efforts to achieve sustainable and inclusive development? Let us know by leaving a comment below.

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About the author

Helen castell profile
Helen Castell@flippinowl

Helen Castell is a London-based financial journalist with nearly 20 years’ experience covering trade, energy and risk for TXF, Shares Magazine, Global Trade Review, Newsbase, Trade Finance Magazine and other Euromoney publications. At Devex, she writes about development banking, private sector engagement and funding trends. She studied English Literature at Sheffield University and International Journalism at London’s City University, and speaks English, Spanish and Japanese.


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