Urgent need for African free-trade infrastructure

The African Continental Free Trade Area (AfCFTA) agreement has created the largest free-trade area. It is expected to create opportunities for African countries to diversify exports, attract foreign direct investment (FDI) and boost regional self-sufficiency.

The AfCFTA is also expected to aid African economies recover from the Covid-19 pandemic, with full implementation of the agreement also serving to improve the continent’s resilience to future economic shocks.

Trading under the agreement began continent-wide on January 1. By March, 54 of Africa’s 55 countries were reported to have signed, with 36 having deposited their instruments of ratification. However, the commencement has not come without challenges. These include infrastructure inadequacies, institutional voids, political pressure from member states and more recently the Covid pandemic, which made the continent’s economic impediments worse. The pandemic has been viewed as a catalyst for  speedy implementation of the AfCFTA by highlighting the continent’s heavy reliance on value-added imports, and the infrastructure limitations to intracontinental trade.

The basis of the agreement is that the reduction of tariffs and nontariff barriers will boost intracontinental trade, and consequently encourage the integration of African businesses into global supply chains. Trade costs have become a focus of discussion in African trade policy circles due to their increased visibility when it comes to reducing trade barriers. In the context of Africa’s rapid integration under the AfCFTA, the imperative to reduce trade costs seems even more urgent than that of developing and improving trade enabling infrastructure.

It is common cause that high tariffs, nontariff barriers and bureaucratic red tape make African internal trade costly than in the rest of the world. However, as important as this may be, the action of reducing costs will not be as significant a factor in boosting trade as overcoming the infrastructure challenges faced across the continent. Key developments in transport infrastructure, communication channels, manufacturing and warehousing plants will have far-reaching long term effects. Reducing costs will prove futile if goods cannot be moved because the required infrastructure is inadequate or nonexistent.

That said, the AfCFTA has already provided companies such as Nigeria's Dangote Industries with the impetus to expand cement and fertiliser production capacity as businesses across the continent strategise to improve infrastructure and critical value chains. This has been done through the creation of new trade routes under the AfCFTA. In 2020 the UN Conference on Trade & Development reported that for the Africa free trade area to work the deficit in infrastructure (estimated at $130bn–$170bn) should be viewed through the prism of private sector participation.

The Dangote group is thus aiming to leverage this deficit by investing in cement in Africa. In January Dangote Industries released a statement containing plans to commission new cement plants in Niger, Benin, Ghana, Cote d’Ivoire and Togo, while existing factories in Cameroon and Nigeria would increase output. The ultimate goal is to make Africa self-sufficient in cement production.

It is critical for African governments to provide private players with incentives to develop infrastructure, such as tax deductions, royalty waivers and rebates. Regional trade blocs such as the Economic Community of West African States and East African Community have already managed to boost and integrate regional trade through co-operation with the private sector. Public-private partnerships have been effective in developing road infrastructure, for example. The lessons learned by Africa’s regional trade blocs must be applied on a continental scale to help develop infrastructure and facilitate trade.

According to the Africa Energy Chamber wiping out the continent’s energy deficit will cost between 2% and 4% of total annual GDP. This is a huge obstacle, but a failure to act could be even more costly to business in the form of frequent power disruptions and withheld investment. The continent will need more energy in future, not just to keep up with developing industries and increased residential demand as a result of enhanced trade, but also to deal with the effects of climate change. Agriculture is likely to require more pumped irrigation, homes and businesses could require more climate control mechanisms, and states will need to reinforce infrastructure.

Africa has abundant supplies of renewable energy resources, including solar radiation, hydro and geothermal power potential and wind resources. In addition, there has been a series of major natural gas discoveries and projects across the continent, including the Brulpadda gas field off SA’s southern coastline, Ghana’s offshore liquefied natural gas (LNG) terminal, and the 40-trillion cubic feet gas resource found in Senegal, to name but a few.

In Southern Africa, the recent armed insurgency notwithstanding, Mozambique is expected to become the second-largest LNG producer in Africa after the completion of various projects, and it has the potential to become the fourth-largest global LNG exporter after Qatar, Russia and Australia. To put this into perspective, the combined production capacity of Mozambique’s LNG projects would equal 81% of all African LNG exports by 2023.

Prioritising the development of LNG storage and pipeline infrastructure in receiving nations, especially in Southern and East Africa, will generate jobs and ultimately allow for an increase in intraregional trade. While diversifying Africa’s electrification solutions is crucial to achieving universal energy access, continual private sector participation will also play an important role in revitalising the energy sector. The collective participation of the public and private sectors could also prompt the import and export of technology, expertise and LNG feedstock from country to country, activities supported under the AfCFTA.

The AfCFTA agreement has the potential to be just what Africa needs to rebound from the Covid pandemic and achieve its economic and sustainability goals. However, the continent’s track record of poor implementation hangs like a dark cloud over it. The AU has not invested as much time and resources as it should in encouraging infrastructure development, a critical trade enabler. In addition, the mandates of key institutions such as the African Development Bank should be redefined to facilitate the funding and implementation of infrastructure development initiatives targeted at supporting regional integration.

The AfCFTA can achieve the desired outcomes only if the focus is shifted from lengthy, painstaking policy development processes to infrastructure development. Without infrastructure changes the trade agreement risks being stifled by the implementation crisis that bedevils Africa.

• Panashe is an associate and Rambire an analyst at market research and strategy consultancy Birguid. This article is based on a recent research report on Sub-Saharan Africa’s LNG industry, covering SA, Mozambique, Tanzania and Nigeria.