Regional Approach to the Integration of Logistics Services in the EAC

Article I wrote for EABC in 2013 republished here.

The five East African Community (EAC) countries vary in their degree of integration into world markets, global supply chains and application of global best practices in trade logistics. The 2012 publication Trade in the Global Economy, compares the Logistics PerformanceIndex (LPI) of 155 countries and is measurement of the logistics efficiency of an economy. The performance of the EAC Partner States is poor overall, and not surprisingly it varies widely between the landlocked and transit countries. Tanzania for instance scores the highest LPI in the EAC region with a rank of 88 out of 155 countries, followed by Kenya at 122, Rwanda at 139 and Burundi at 155. Landlocked economies are geographically disadvantaged and restricted with regard to transit and logistical transport conditions outside their borders and hence faced with longer transit times and higher transit and transport costs. Recent studies show that importing into a landlocked country typically takes a week longer than its coastal neighbors while freight costs alone can be up to 40 per cent of export values for landlocked developing countries. The higher costs are caused by inadequate transit transport inter-modal connections, poor regulation and service and to address these concerns, the EAC region could benefit from a regional approach to streamline the logistics services sector and consolidate the broad range of logistics institutions, private sector, and relevant stakeholders into a single cross-border transport, logistics system and platform.

African economies generally have the highest trade logistics costs in the world and the EAC is not an exception to this trend. In a recent study, a set of estimates for Kenya, Tanzania and Uganda places the average cost of trade logistics services at the equivalent of a tax of between 25 and 40 percent on value added, which is rather alarming. For this reason, overall performance of the logistics sector in the EAC can impact negatively on the regions trade competitiveness, trade expansion, export diversification, ability to attract foreign direct investments, and invigorate economic growth. While infrastructure is an important and costly constraint, institutions, the regulatory environment and regional cooperation are equally vital for efficient logistics services and the consolidation of the EAC customs union and common market. 

Logistics services encompass streamlined door-to-door multimodal transport services from a logistics chain perspective and they determine the cost of getting goods from point of supplier to point of buyer. These services include services auxiliary to all modes of transport such as maritime, road, air, rail and pipeline services, freight and include other relevant services such as courier, cargo and freight services, customs broker services, testing services, warehousing, distribution, information and communication management and some aspects of financial services. Logistics services have become an increasingly large obstacle to Africa’s trade performance because of a profound change in the nature of international trade that has taken place in the last quarter century: the explosion of “trade in tasks.” In some manufacturing activities, a production process can be decomposed into a series of steps or tasks and since transport and coordination costs have fallen in many parts of the world, it has become efficient to produce different steps in the process in different countries. Even though African enterprises could compete with Chinese and Indian firms in factory floor costs in some product lines such as garments and other simple manufactured goods, overall African producers might be unable to compete given that the cost and efficiency of logistics services in the continent is a major supply side constraint 

Reforms are underway in the EAC region, to consolidate the customs union through various separate interventions, including harmonization of policies and regulations, modernization of transport and border management institutions, the NTB monitoring mechanism, standards and testing and investment in infrastructure. The 2012 World Bank Doing Business Report indicates that all 5 EAC economies implemented 11 combined regulatory reforms in trade facilitation, in areas such as the electronic submission of documents, risk management systems for inspections and joint border cooperation. While this is commendable, rather than individually address interlinked trade logistics issues, the EAC Partner States could jointly consider a comprehensive program on trade logistics services to address the weakest links in the macro-supply chain and thereby stimulate cooperation between public and private players. A legal instrument similar to the Logistics Protocol found in the ASEAN region, could provide a cross-sectoral platform for regulatory cooperation and dialogue among government, business, and civil society. An EAC logistics sectoral protocol would also consolidate the cross-cutting objectives of the Common Market as enshrined in Part B of the Protocol on the Establishment of the Common Market Protocol. A useful place to start would be a road-map for the integration of the logistics services sector through a framework for private public consultative dialogue, progressive liberalization and trade facilitation, in order to support the enhancement of EAC competitiveness and creation of an integrated trade logistics environment. 

Can Africa Feed Africa?

A new World Bank report Africa Can Help Feed Africa: Removing barriers to regional trade in food staples ―says that Africa’s farmers can potentially grow enough food to feed the continent and avert future food crises if countries remove cross-border restrictions on the food trade within the region. According to the Bank, the continent would also generate an extra US$20 billion in yearly earnings if African leaders can agree to dismantle trade barriers that blunt more regional dynamism. The report was released on the eve of an African Union (AU) ministerial summit in Addis Ababa on agriculture and trade.

According to the report “Africa has the ability to grow and deliver good quality food to put on the dinner tables of the continent’s families, however, this potential is not being realized because farmers face more trade barriers in getting their food to market than anywhere else in the world. Too often borders get in the way of getting food to homes and communities which are struggling with too little to eat.”

With many African farmers effectively cut off from the high-yield seeds, and the affordable fertilizers and pesticides needed to expand their crop production, including unpredictable weather patterns, the continent has turned to foreign imports to meet its growing needs in staple foods.

See full report here for some policy considerations.

Linking Trade Policy to Supply Chain Constraints

Since the birth of the GATT in 1947, multilateral negotiations have focused primarily on reducing barriers to trade for specific products and sectors: tariffs, subsidies, and different types of nontariff barriers. A recent report by the World Economic Forum, in collaboration with Bain & Company and the World Bank (WEF 2013), Enabling Trade: Valuing Growth Opportunities (World Economic Forum, Bain & Co. and World Bank 2013) concludes that improving border management and transport and communications infrastructure services could increase global GDP by up to six times more than removing all import tariffs.

Reducing supply-chain barriers to attain 50% of the global best practice level – as observed in Singapore – could increase global GDP by some 4.7% and global trade by 14.5%. By contrast, the global GDP and trade gains available from complete worldwide tariff elimination amount to some 0.7% and 10.1%, respectively. The gains from reducing supply-chain barriers would also be more evenly distributed across countries than those associated with tariff elimination. A less ambitious set of reforms that moves countries halfway to regional best practice (e.g. Chile in Latin America) could increase global GDP by 2.6% and world trade by 9.4%.

A pilot project implemented by eBay shows that helping small and medium-sized enterprises navigate the regulatory regimes of importing countries could expand their volume of international sales by 60 to 80%. Given that small and medium-sized enterprises account for a large share of total economic activity, this type of targeted trade facilitation could have significant positive spillover effects on employment.

Such large increases in GDP would be associated with positive effects on unemployment, potentially adding millions of jobs to the global workforce.

What could be done to realise the large potential welfare gains from an approach to policy focussed on supply chain barriers? The World Economic Forum report makes five specific recommendations:

1. Create a national mechanism to set policy priorities for improving supply-chain efficiency based on objective performance data and feedback loops between government and firms;

Governments must work with businesses and analysts to determine the policies and procedures that will help reach key tipping points. A central component of this effort should be the creation of mechanisms to collect data on factors affecting supply-chain operations. These data can then be used to identify ‘clusters’ of policies that jointly determine key supply chain barriers, identify priorities for action, and assess progress.

2. Create a focal point within government with a mandate to coordinate and oversee all regulation that directly affects supply chain efficiency;

Given the importance of tipping points, governments need to design policy with an economy-wide vision and recognition that industry-specific supply chains are affected by different clusters of policies. Improving supply-chain performance requires coherence and coordination across many government agencies and collaboration with industry.

3. Ensure that small and medium-sized enterprises’ interests are represented in the policy prioritisation process and that solutions are designed to address specific constraints that impact disproportionately on these businesses;

Because small and medium-sized enterprises’ ability to overcome supply-chain barriers is proportionally more difficult, governments should pay special attention to the needs of smaller businesses. For example, one relatively straightforward policy identified in the report is to raise levels for customs-duty collection that are too trivial to merit serious consideration in order to facilitate small-business engagement in international markets; another is to ensure that initiatives to reduce regulatory compliance costs such as ‘trusted trader’ programmes are complemented by programs that are accessible to small and medium-sized enterprises.

4. Pursue a ‘whole of the supply chain’ approach in international trade negotiations;

Greater coherence of domestic policies is important, but a key insight derived from the case studies is that coordination across countries matters as well. Joint action will increase the overall gains from lower supply-chain barriers. International trade negotiations usually take a silo approach, addressing policy areas in isolation. Lowering supply-chain barriers requires a more comprehensive and integrated approach that spans key sectors that impact on trade logistics, including services such as transport and distribution, as well as policy areas that jointly determine supply-chain performance – in particular those related to border protection and management, product health and safety, foreign investment, and the movement of business people and service providers.

Such a ‘whole of the supply chain’ approach can be pursued both at the multilateral (i.e. WTO) level and in regional trade agreements. Doing so would greatly enhance the relevance of international trade cooperation for businesses and help generate the engagement that is needed for trade agreements to obtain the political support needed to be adopted by national legislatures and to be implemented by governments. As has been argued by many observers, one lesson of the failure to conclude the Doha Round is that what is on the table is not seen to make enough of a difference from an operational business perspective. A supply-chain approach has great potential to address this failure and in the process provide a low-cost economic stimulus for the world economy in the medium term.

5. Launch a global effort to pursue conversion of manual and paper-based documentation to electronic systems, using globally agreed data formats.

Many of the inefficiencies in the operation of supply chains reflect a lack of reliability due to delays and uncertainty stemming from manual paper-based documentation, redundancy in data requirements and the absence of pre-arrival clearance and risk management-based implementation of policy. A global effort to adopt common documentary and electronic data/information standards would reduce administrative costs, errors, and time associated with moving goods across borders.

To address some these challenges, it is hoped that the WTO negotiations on trade facilitation will be succesfully concluded in Bali at the end of this year, 2013.

Structural Changes in the SA Aviation Industry

A new airline is reportedly seeking a certificate and air service licence issued by the Air Service Licensing Council in SA in order to gain admittance into the local South African airspace. This should be good news for consumers.

The Business Day carries the following excerpt:

"A NEW airline flying between Cape Town, Durban and Johannesburg may grace SA’s skies this year, adding to competition in a sector traded by at least three budget airlines and South African Airways.  Very little is known about the backers of Durban-based Velvet Sky, and a source who did not wish to be named said yesterday that it would be premature to comment on plans.....

SA’s airline industry is in a state of structural change, with premium national airlines such as South African Airways losing market share against no-frills competitors such as JSE-listed 1time and kulula.com.

Last month, low-cost airline Mango took over all the Durban-to-Cape Town flights from its parent, South African Airways. The move has been interpreted as part of a strategy by the national carrier to exit short-haul routes where it has lost market share."

Programme for Infrastructure Development in Africa (PIDA)

The Programme for Infrastructure Development in Africa (PIDA) was launched on 24 July 2010 in Kampala, Uganda, along the sidelines of the 15th African Union Heads of State and Government Summit.  PIDA is a continent-wide program to develop vision, policies, strategies and programs for the development of priority regional and continental infrastructure projects in transport, energy, trans-boundary water and the ICT sectors.

PIDA is a joint initiative of the African Union Commission (AUC), the New Partnership for Africa’s Development (NEPAD) Secretariat and the African Development Bank (AfDB) Group. PIDA's program scope is quite broad in coverage. It covers transport (air, sea, river and lake, lagoon, rail and road), energy (electricity, gas, petroleum products and renewable energy), ICT, and transboundary water resources (primarily irrigation, hydropower, and lake and rivers transport), and deals with the regional and continental aspects of these sectors. 

The motivation for this initiative is rooted in Africa's infrastructure deficiencies which continue to hamper the continents growth and economic development. Infrastructure deficiencies also lead to increased production and transaction costs which result in decreased competitiveness for businesses and thereby also hinder the implementation of social and economic development policies.  The 3 institutions further recognize that in Africa:

• There is access to electricity for only 30% of the population compared to rates ranging from 70 to 90% for other major geographical zones of the developing world (Asia, Central America and the Caribbean, Middle-East and Latin America)
• Transboundary water resources constitute approximately 80% of Africa’s freshwater resources. However, current levels of water withdrawal are low with 3.8% of water resources developed for water supply, irrigation and hydropower use, and with only about 18% of the irrigation potential being exploited.
• A telecommunications penetration rate of about 6% compared to an average of 40% for the other geographical zones, and a very low penetration rate for broadband services and fixed lines.
• A road access rate of 34% compared to 50% for the other geographical zones.
• The global competitiveness indices calculated by the World Economic Forum indicate that for Africa these indices are lower than those of other regions of the developing world and infrastructure appears to be the underlying factor that contributes most significantly to Africa's relatively low competitiveness.  In fact the 2009 Africa Competitiveness Report concluded that Infrastructure remains one of the top constraints to businesses in Africa.

Other issues to be addressed by PIDA will include: the need to fill information gaps on infrastructure deficits, causal analysis, development of prioritized strategic frameworks, establishment of infrastructure investment programs around RECs strategic priorities and improved implementation strategies for these programs.  All national aspects (including, without exception, physical infrastructure, national policies, institutional and regulatory frameworks, technical standards and benchmarks) will only be considered if they have an impact on, or could be affected by, the regional and continental aspects.

The PIDA initiative requires a total amount of USD 11,391,527, which includes the cost of an independent advisory panel of experts (supported by DFID), regional and sector consultative workshops (supported by NTCF and EU) and implementation of an infrastructure database (supported by the EU). The Sector Studies component alone requires a total amount of USD 7,552,343, with the ADF providing 25.6%; the African Water Facility (AWF) with 24.6%, the Islamic Development Bank (IsDB) with 23.3%, and the NEPAD-IPPF USD 2.0 million grant representing 26.5% of the cost.  

Sources can be accessed here.

Kenya's Economy; Driven by Services With Merchandise Exports Declining

While telecommunications, construction and transport sectors continued to drive Kenya's economy in 2009, merchandise exports have shrunk over the years and the Port of Mombasa has been identified as one stumbling block to Kenya's continued economic growth.  

This is according to the 2010 Kenya Country Report by the World Bank which finds that Kenya's growth rate was 2.5% in 2009 with higher projections of 4.0% foreseen in 2010. Even tourist arrivals registered a 18.9 percent growth in the first quarter of this year showing positive signs for this sector. Nonetheless, for the third consecutive year, Kenya's growth will continue to lag behind its EAC neighbours, as shown below.  

     The Report finds that overall, services grew by 4.2% and increased share of GDP from 50 % in 2000 to 55% of GDP in 2009. Agriculture contracted by 2.4%,and the role of agriculture in the economy  declined from 32% in 2000 to 26% in 2009, due in part to drought. Meanwhile, industry grew at 3.9% in 2009 due to the construction sub sector. 

This mixed performance is in part structural and in addition, Kenya remains sensitive to climatic conditions.  For instance, the 2009 weak performance in manufacturing was caused by the spillover effects from the drought which caused higher electricity costs, power outages and reduced water supply. The drought had spill-over effects in all sectors and clearly increased efforts in key infrastructure services will be necessary, to sustain increased growth.

Kenya’s economy is currently more dependant on domestic consumption than exports, and Kenya’s highest value exports, especially horticulture and tourism remain heavily dependant on Europe. This high degree of export concentration makes Kenya vulnerable to external shocks and points to the need to further diversify export markets. 

Surprisingly, Kenya has an export strategy, which was approved by Cabinet in 2004.  See previous post here on the weaknesses of export-led strategies. 

While exports of goods have been unimpressive, services exports increased from 8% in 2000 to 12% of GDP in 2009.  The strength of the domestic sector and the weakness in exports has created a large and growing current account deficit which reached 5.5% of GDP by end 2009. This current account deficit was financed mainly by increasing short term financial inflows including investment. 

                              One lesson learnt- so to speak- is that Kenya has not yet developed a targeted and strategic industrial policy. This is despite having several national policy documents such as the Vision 2030, the Private Sector Development Strategy, the Master Plan for Kenya’s Industrial Development, and the recently drafted National Trade Policy. 

East and West Africa World's Apart on Trade

East and West Africa may be on the same continent, just five hours flight from each other, and with complementary economies that would make it natural enough for a high level of interaction.

But, in reality, they are virtually cut off from one another.

With a combined population of two-fifths of a billion, and well-matched resources, East and West Africa have some of the lowest trade between them of any regions in the world, according to a UN report, with just one carrier running costly and often half-empty flights between the regions, no road route, and negligible traffic between the two continental hubs.

To fly to West Africa from East Africa costs twice or thrice as much as flying from Africa to Europe, including to London, which is eight and half hours away.

As example, flying to Dakar on economy and business costs $1,281 and $4,076 on Kenya Airways and is possible on three flights a week.

Read the full article here.

Impact of Transport on Landlocked Countries

At present, about one out of five countries in the world are landlocked and only three high-income economies out of 35 are landlocked. Of the 31 Land Locked Developing Countries (LLDC) in the world, 15 are in Africa. Being land locked significantly affects the GDP per capita of these countries. For instance, over the period 2003-05, GDP per capita of LLDCs was approximately 50% of the GDP per capita of transit developing countries and only about one quarter of GDP per capita of developing countries in general.

The main problem with regard to being landlocked is the geographical remoteness from the sea and transit dependence complicates the export and import processes.  As a result LLDCs trade less, grow more slowly than neighbouring coastal countries and for example countries like Burundi, Central African Republic and Mali spend an average of 15% of export earnings on transport and for some the cost can be as high as 50%.

According to World Bank Study, Improving Trade and Transport for Landlocked Developing Countries the cost of transporting a container from an LLDC to a port in a developed country is 20% higher than transporting from a coastal country.  The main causes of the higher costs are inadequate transit transport inter-modal connections, regulation and poor service.

The cost of importing from a LLDC is also rising and the Study also suggests that improving road infrastructure alone is not sufficient to eradicate inefficiency and high transport costs.  As indicated in previous posts in this Blog, the other main problems are associated with port infrastructure and the quality of port services which affect the cost and process of dispatching goods in and out of transit countries.

In addition,  it is estimated that manufacturers shipping from SSA pay nearly three times more in container handling charges at African ports than manufacturers shipping from Europe.   As shown in the above chart, in some SSA countries the cost of importing a standard-sized container is reportedly more than twice the world average. Added to these charges are the indirect costs associated with time delays at the port of entry and costs of transporting  goods to inland destinations and  in particular onward delivery to landlocked countries.

Inter-modal Linkages in Africa's Transport Sector

Intermodal transitions (in which freight is transferred from trucks to trains, trains to ships, or other modal combinations) is particularly time consuming and inefficient throughout Sub Saharan Africa (SSA).  In many cases, intermodal links are the main bottleneck for freight movement and for many SSA countries, the freight forwarding industry is entirely reliant on manual loading and unloading for intermodal transitions. This is in stark contrast to more developed economies.   

For example, improving intermodal links was a major factor in the export-driven development of Southeast Asian countries. Starting in the 1980s, these countries restructured their transport sectors into multimodal supply chain management sectors that took advantage of containerization and the internationalization of production.   Improvements in intermodal links in Southeast Asia were correlated with increased trade flows (especially of intermediate goods), increased integration into global production networks, and growth in domestic manufacturing sectors.

Intermodal connections can facilitate the vertical integration of commodity chains since logistics sectors typically evolve from a three-stage system of transporting commodities (from rural hinterlands to marketplaces, from marketplaces to ports, and then from ports to overseas markets) to integrated door-to-door supply chains;  a highly efficient system.  

Logistics and intermodal transitions are clearly areas where African countries need to enhance their transport sector efficiencies further.

Impact of Overland Transport on Intra regional Trade in Africa

A recent USITC Study titled Sub-Saharan Africa: Effects of Infrastructure Conditions on Export Competitiveness, Third Annual Report found that intra-regional trade as a percentage of total trade in SSA averaged only 8 percent, compared to 44 percent in East Asia.  The fact is that there are intra-regional trade opportunities among African countries, especially for countries that share a border and in fact neighboring countries often have integrated transport networks and bilateral transit or customs agreements. However, the poor quality, high cost and overall port-oriented design of land transport infrastructure in SSA inhibits intra-regional trade.   

As an example, there is no overland trade between South Africa and Nigeria, the two largest economies in Sub Saharan Africa and as shown in the figure (source: Adapted by USITC from OECD, Africa Economic Outlook 2008) there is little overland connectivity between West and Southern Africa. 

However improvements in land transport infrastructure will not necessarily lower transport prices in regions where regulations render logistics markets uncompetitive. Transport firms capable of exercising monopolistic power may still maintain high transport prices and avoid passing along savings to end-users. For instance where market regulation is strong, there are high barriers to market entry, and freight bureaus and transport associations can have great influence, resulting in high transport prices. As a consequence, freight transport services in Africa can be more expensive than those in developed countries and similarly, the cost of intra regional trade would be high.

While improved road and rail links and infrastructure may increase trade between SSA countries by integrating markets and facilitating specialization, intra-SSA trade effects may also be limited by the fact that many SSA countries produce similar commodities (agriculture, oil and minerals), while demand for imports tends to be for manufactured goods.  Hence there are limited complementarities between regional economies in SSA, and in the absence of changes in the trade profiles of SSA countries, there may be little natural momentum to spear dramatic changes in infrastructure investment.