Reforming the Policy and Regulatory Framework for Transport Infrastructure in Africa
31 October 2013
Source: By Michael Jordan, Consultant
It is well recognized that the costs of trade - the transport and other costs of doing business internationally - are important determinants of a country's ability to participate in the world economy. When costs are relatively high, domestic producers are less competitive because they pay more for imported inputs and they earn lower margins on exports. This note summarises the key challenges facing transport infrastructure and suggests the critical reforms to the policy and regulatory framework needed to deal with them.
African transport costs are among the highest in the world, - about 20% of total product costs – which helps explain why Africa accounts for less than 2.5% of world trade, and has the lowest level of intra-regional trade.
Higher costs are incurred all along the supply chain. Cargo-handling charges tend to be higher at African ports than in most other parts of the world. Container-handling charges at ports in Africa range from $100 to $300 per container, compared to between $80 and $150 per container elsewhere. High port charges are caused by technical deficiencies, such as lack of maintenance and by institutional deficiencies, including poor planning and weak regulation of monopoly service providers. Road freight rates in Africa are also high, reflecting the lack of competition in the trucking industry and market sharing arrangements among truckers, particularly in Central and West Africa.
The cost of transport is directly related to the time taken for the journey. One truckers association recently found that it took its members on average 15 days to complete the journey between Kolwezi in the Democratic Republic of Congo and Durban in South Africa, and that half of the time was spent at border crossings. Another study of the impact of time on exports of 44 sub-Saharan African countries found that, in general, a one day shorter inland travel time leads to a 7% increase in exports, and to a 9% increase in exports for landlocked countries.
Being landlocked raises transport costs significantly. According to the Doing Business survey, the average cost of shipping a container for African exporters in 2012 was US$ 1,990 compared with US$ 1,268 in Latin America. But the cost for many landlocked countries, such as Niger, Rwanda and Zambia was more than 50% higher than the African average.
Many Factors Hinder Performance of the Transport Sector
Many factors conspire to impose cost penalties on importers and exporters in Africa, particularly in poor, landlocked countries.
The transport and communications networks in Africa are far less developed than in other regions as was extensively documented in African Infrastructure Diagnostic (AICD). Geography also plays a part in hindering trade: markets are fragmented and borders are difficult to cross, impeding the emergence of regionally integrated industries and supply chains. However, the most serious impediments are administrative. Several studies have found that the market structures and weak regulation of the road, rail and port sectors, rather than the quality of physical infrastructure, are binding constraints. In addition, connectivity is poor between modes of transport, particularly between ports and land transport, and between countries because of non-tariff barriers, and inefficient border administration.
Finally, Africa has arguably the worst safety record in the world across all modes of transport. The estimated cost of road crashes alone ranges from about 1 percentage of GNP in South Africa to almost 5% in Kenya and Malawi. This lamentable record is attributed mainly to weaknesses of safety regulatory institutions and inadequate supervision.
All of these factors contribute to the high charges and poor quality of transport and logistics in Africa. Unless the underlying causes of high trade transaction costs are addressed, African countries will remain high-cost producers
Reforming the Enabling Environment will be Critical to Improving Transport
A robust and transparent regulatory and institutional framework is an essential condition for improving the performance of transport operators and efficient use of the transport infrastructure.
In most African countries the regulatory and institutional framework for transport and trade is not adequate to these tasks. National transport policy statements generally fail to address the fundamental issues facing the sector such as the extent to which competitive markets in transport infrastructure and operations should encouraged, the purpose and scope of regulatory and licensing controls or the respective roles of government and the private sector in developing the transport infrastructure. Without clear policy statements to give direction to decision-makers and operators, a country lacks a solid basis for countering non-competitive practices by transport operators and for encouraging private investors.
Few African countries have effective regulatory agencies for the transport sector, creating a regulatory vacuum in which anti-competitive practices - such as the refusal to license foreign-owned trucks to operate –can develop and be persist and in which agencies can impose levies on transport operators without regard for their impact on efficiency and costs. By contrast, observers credit much of the success of Nigeria in concluding concession agreements with private operators to manage and rehabilitate 26 container terminals to the reforms made to the institutional setting, which included defining the role of the Federal Ministry of Transport over sector policy and creating new autonomous regional port authorities as the “landlords” of the ports.
In many countries and regional organizations, the implementation of policies and regulations is unreliable and incomplete. In particular, countries have often failed to enact or apply domestic legislation needed to make effective their commitments under regional co-operation agreements. For example, few countries have fully complied with the provisions of the Yamoussoukro Decision of 1988 aimed at liberalizing air transport or have simply ignored it by continuing to apply earlier bilateral agreements.
Attracting Private Participation
Investors and infrastructure service providers look for certainty about the market, technical and financial parameters under which they will be allowed to operate before making commitments.
The transport sector has attracted only around 23% of total private investment in Sub-Saharan Africa, compared with over 30% in Asia and 29% in Latin America. Although, private participation in container terminals in the region has grown rapidly since 2000, mostly in concession contracts, the level of private sector investment in the African port sector is still low compared with other regions.
A recent study by MIGA found that confronting policy and regulatory risks can have an immediate effect in making countries’ business environment more competitive for investment. The rapid growth of private investment in the telecommunications infrastructure in Africa resulted from the liberalisation in licensing which led to the entry of new market players in the sector and the adoption of mobile technology.
The Way Ahead: Outline of an Agenda for Reform
Against this background, it is clear that reform of the policy and regulatory system is critical to making transport infrastructure more efficient. In addition, changes to the “soft” infrastructure are often cost effective compared with investment in new physical assets. For example, the changes in the administrative procedures at the Malaba border crossing between Kenya and Uganda (which did not require significant capital expenditure) helped reduce crossing times from over 48 hours to less than 6 hours with resulting savings for transporters, traders and the customs authorities.
Substantial efforts are being made by several Regional Economic Communities (RECs) to facilitate trade, such as through the North-South Corridor Aid-for-Trade Programme, launched in 2009. But measures to reform the “soft” infrastructure can be hard to implement, especially if they depend on bilateral or multilateral decision making.
The scope and priorities of the reform agenda need to be adapted the specific issues and implementation capacities of individual countries, but the general approach should have some common features.
Getting the “Basics” Right is Critical to Achieving Meaningful Reform
This calls for:
- Starting at the top, by ensuring that countries’ and regional economic communities’ transport policies address the key strategic issues for improving the efficiency of transport operations and attracting private participation in developing the infrastructure, including defining:
- The extent to which competition should be encouraged (within and between modes of transport);
- The scope and purpose of regulatory and licensing controls which should be exercised over transport infrastructure and operations;
- The role of pricing, cost recovery and taxation in encouraging competition between modes of transport;
- The respective roles of government and the private sector in providing transport infrastructure and services, in particular the scope for adopting Public-Private Partnerships;
- The procedures to be used to check whether approved strategies and plans, including international commitments within African Regional Economic Communities, are being implemented.
Establishing effective regulatory frameworks which ensure that service suppliers operate with the parameters of transport policy and their meet social obligations and as well as achieving acceptable levels of financial performance. This means that regulatory agencies should have the legal powers and institutional capacities to satisfy the meta-principles of credibility, legitimacy and transparency.
The appropriate scope of regulatory functions and the level of regulatory discretion should be securely defined within the political, and legal arrangements of individual countries, and be compatible with their level of political commitment and available skills. This may mean adopting a hybrid model of regulation, appropriate to the national context, which could include contracting out of certain regulatory functions.
In countries where creating new agencies is not feasible, countries should at least separate responsibility for regulation and operations for transport operations (e.g. ports and railways) where these are combined in a single Ministry or agency, to avoid entrenching inefficient monopoly service providers.
Implementing and enforcing existing regulations and commitments. To improve compliance with established regulations and reduce procedural barriers to transport and trade, countries need to strengthen reporting and monitoring mechanisms and heighten awareness of the extent and damaging impact of restrictive practices, corruption and poor safety standards.
Focusing the Scope of Regional Integration
African governments and REC’s should prioritize the ongoing series of regional negotiations towards Free-Trade-Areas or Customs Unions and proceed sequentially rather than simultaneously, focusing on those which offer most potential for tangible gains through liberalizing trade and harmonizing non-trade barriers.
African leaders have made repeated political commitments to greater economic regional integration, most notably the 1991 Abuja Treaty in which they agreed to develop Free-Trade-Areas in each REC as building blocks for a continent-wide customs union and ultimately an African Economic Community by 2028.
The negotiation and implementation of regional trade agreements between RECs has proven a major challenge. Many factors have militated against the process of integration, including the overlapping membership of the REC’s, concerns about ceding national sovereignty to supranational bodies and as well as the limited technical capacity of many member states to engage in complex negotiations of tariffs and harmonization of non-tariff barriers.
In some cases, the RECs have hardly begun the process of integration. In others, it is being further complicated by the overlaying of negotiations involving different RECs. For example, the East African Community (EAC) initiated negotiations in 2005 for a customs union among its member states with a target completion date of 2010, but this is unlikely to be completed before 2016. At the same time, the EAC is also engaged in negotiating a Tripartite Free Trade Area (TFTA) with COMESA and SADC since 2011.
This multi-track approach to integration could be counter-productive. First, it is extremely difficult to engage in parallel negotiations for a free-trade area and customs union, since the two approaches to trade liberalization involve differing potential gains and losses, which is likely to result in participating states offering only minimal concessions. Secondly, the administrative burden of simultaneous negotiations on organisations with limited technical skills and experience inevitably slows the pace of the overall process. Thirdly, the complex and parallel process makes it difficult to identify and assess the critical issues which need to be referred to high level political leaders to resolve.
Government, Service Providers and Development Partners Should Co-operate.
Governments, investors and development partners all have an interest and role in promoting reform of the policy, regulatory and framework as a condition for a sustainable development of the transport infrastructure and accelerated economic growth.
Improving Donor Co-ordination
OECD DAC Reporting System data show that development agencies allocated roughly 22% of Official Development Finance for Africa’s infrastructure to the enabling environment. They support a wide range of capacity and institution building activities. But, OECD data also shows that there is significant aid fragmentation, while development agencies say they face challenges due to the disconnect between country and regional priorities, lack of co-ordination and capacity among partner government ministries and regional communities, and inadequate country systems.
In addition, development financing and transaction-related technical assistance programs often do not pay sufficient attention to the need for creating an enabling environment for sector reforms
Engaging with the Private Sector and other Stakeholders
Attention to the political economy of reform through stakeholder consultation, and communication contributes to reducing resistance to reforms. But more could be done to encourage more frequent consultation with business and consumer groups in formulating policies and monitoring their impact. In addition, ICA could facilitate the sharing of regulatory good practices and know-how, for example, by mobilising the network of the African Forum of Utility Regulators (AFUR).