The role of infrastructure services for development in Africa

13 August 2012

The World Bank’s Africa Infrastructure Report concludes that, in addition to suffering from poor quality and coverage,  Africans pay rates that are several times higher than in other developing regions for infrastructure services like electricity, water, sanitation, transport, logistics, finance, and information and communication technology (ICT). In the case of electricity, prices may genuinely reflect higher costs, but prices in transport, banking, and ICT suggest exceptionally high profits, which in turn undermine the competitiveness of other productive sectors. Despite huge potential, Africa accounts for just two percent of the global services trade, a share that has remained stagnant for the past 20 years.

The examples discussed in this article illustrate how achieving openness and competitive markets requires on-going regulatory reforms to avoid distorted markets, regulatory capture and to ensure price transparency. Lack of openness also presents a barrier to entry for regional services suppliers.

A sizeable body of literature exists on the costs of inefficient services and restrictive services regulations. These studies demonstrate that open services are critical for economic growth. Services are of particular importance to land-locked non-oil exporting countries in Africa that incur high transport costs when trading. It is not surprising, therefore, that services in these countries have grown more than three times faster than goods exports over the past decade.

The cost of distorted services markets: examples from transport and ICT
Despite its low wages, the trucking services industry in Africa is characterised by high transport prices, especially in West and Central Africa, fragmented regional markets for transport and logistics, and  poor service quality compared to other developing regions.  Studies of transport corridors across Africa find that freight logistics are fraught with anti-competitive behaviour, corruption, and inefficiency.

Various studies have estimated road transport costs in Sub-Saharan Africa to be 40 to 100 percent higher than costs in South East Asia. The three landlocked LDCs in West Africa – Burkina Faso, Mali, and Niger – are plagued by high road transport costs due to freight-sharing transport cartels, poor infrastructure, weak logistics, and corruption amongst public officials. A 2008 review of Transport Prices and Costs in Africa found that high transport costs in West Africa present a greater barrier to trade than regional import tariffs. Transport cartels in West and Central Africa enjoyed high profits despite low utilisation of their services – with high entry barriers. The review cautioned that without government action to remove market distortions, further investments to reduce road-transport costs will be futile as cartels will continue to capture benefits from reduced costs while maintaining high tariffs for end users.

Various examples demonstrate that market opening alone will not suffice. Additional regulatory tools are needed to ensure prices and services delivery reflect a truly competitive market. For example, problems with high prices set by South African telecoms persist despite a virtually saturated and competitive market with five mobile and two fixed line networks, revealing underlying policy failure and lack of pricing transparency. A 2012 report by Research ICT Africa examined 46 African markets and ranked South Africa thirtieth in terms of affordability for mobile telephone services. By comparison, prices in neighbouring Namibia were found to be three times lower. New entrants into the South African market have not increased competition but instead set prices according to those established by the market leaders. The same study noted that Ethiopia’s state-owned operator established politically determined below-cost pricing, which does not produce sufficient earnings to re-invest in network expansion. As a result, although Ethiopia boasts some of the lowest prices in Africa, it also suffers from the lowest penetration rate.

Prior to reform, the Government of Zambia applied international gateway license fees of US$12 million in order to protect the monopoly of the state-owned operator, Zamtel, in the international segment. These fees were the highest in eastern and southern Africa, far higher than fees of just US$214,000 in Kenya and US$50,000 in Uganda. The high price of entry led to a distorted market. In June 2010, the government finally dropped the international gateway license fee to US$350,000 and awarded licenses to other operators. Not long thereafter, fees for international voice calls fell by between 40 and 80 percent, providing savings to Zambian consumers and businesses.

In part, distorted market structures are due to domestic pressure from the existing monopoly operators or cartels or fear of job losses from reforms and new competition. Labour unions are particularly effective in voicing these concerns and tend to over-shadow the benefits brought about by lower prices and access to better quality services.

Different measures can be adopted to address the aforementioned challenges, including:

    • Support market reforms to increase openness, competition and  price transparency.

    • Collection of industry data is a sine qua non for informed analysis and policy formulation. This includes periodic market surveys  to understand the impact of government policies and identify areas for policy adjustments to  enhance industry competitiveness.

    • Regulators should periodically benchmark services prices and quality against regional and global partners.

The case of port services
Ports bring together services such as towing, bunkering, ship repair and maintenance, distribution, water-housing, road and rail transport, freight forwarding, and customs broking. The efficiency of ports and logistics is particularly important for Africa’s 15 landlocked countries, whose average transport costs are nearly 50 percent higher than for coastal economies.

A 2010 report by the African Development Bank noted that while 80 percent of global container traffic is handled by commercial global operators in Africa, between 50 to 70 percent of container traffic is still handled by state-controlled operators or public service ports. By global standards, Africa possesses a large number of small ports with capacity below one million twenty-foot equivalent units (TEUs). Container traffic is low, indicating failure to achieve economies of scale and resulting in high freight rates. Only two African ports - Port Saïd and Durban - rank amongst the world’s top 50 ports. Capacity shortages are particularly acute in West and Central Africa. Overall, the majority of state-managed ports in Africa are inefficient, loss-making operations due to below cost tariffs, overstaffing, weak ICT infrastructure, and restrictive government regulations which perpetuate a monopolistic market structure.

The World Bank port reform tool kit (2003) outlines several options for reform in the port services sector with emphasis on re-structuring port management, reforms to the legal and regulatory framework, establishing transparency, financial management reforms, and achieving labour efficiency.

Beyond market opening and private participation: The Case of Nigerian Ports
Nigeria’s ports are the country’s second largest source of revenue after oil. However, Lagos’ port has achieved infamy for inefficiency, congestion, and poor facilities. As part of reforms, between 2003 and 2006, Nigeria awarded 21 port concessions to 15 different local and international terminal operators, including APM Terminals, to manage, operate, and develop the Apapa Container Terminal. APM was expected to raise capacity from 220,000 TEUs per year to 1.6 million TEUs.  Within a few months of APM’s operations, there was a noticeable reduction in berthing space delays, and shipping lines slashed their congestion surcharge from 525 euros to 75 euros per TEU, saving the Nigerian economy US$200 million a year. However, the port soon became congested with over 9700 uncollected containers, a situation which Nigerian customs blamed on the need to physically examine all containers to combat high rates of fraud by importers. In addition, nearly 1000 containers that had ‘cleared’ customs remained uncollected because of a shortage of delivery trucks. These congestion challenges demonstrate that private participation and reforms are needed across the logistics value chain, including distribution, trucking, warehousing, and customs services.

Policy recommendations

    • Countries should prioritise comprehensive reforms to facilitate the participation of private or other operators in order to achieve greater efficiency and competitiveness. Reforms should result in upgraded infrastructure in line with global benchmarks to attract more shipping business and reduce congestion and capacity problems.

    • There are a number of revenue generating segments of maritime transport services that Africa has barely tapped into, such as repair and maintenance and ship registry, that could develop into a regional market. In this regard, it is important to learn lessons from developing countries like the Dominican Republic, Jamaica, and Panama that have established themselves as regional trans-shipment hubs.

    • Regional planning and investment in port infrastructure are critical, especially since several landlocked countries are dependent on ports like Abidjan, Beira, Durban, Dar es Salaam, Lome, and Mombasa. Because ports can be very profitable, they are ideal projects for instruments like infrastructure bonds and other forms of private investment. Regional transport master plans should comprehensively encompass multi-modes of transport under corridors linking hinterlands and ports.

Author: Calvin Manduna, Principal trade expert at the African Development Bank.

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