Of all the countries on the coast of the Mediterranean sea, Egypt seems to have been the first in which either agriculture or manufactures were cultivated and improved to any considerable degree. Upper Egypt extends itself nowhere above a few miles from the Nile and in Lower Egypt that great river breaks itself into many different canals, which, with the assistance of a little art, seem to have afforded a communication by water-carriage, not only between all the great towns, but between all the considerable villages, and even to many farm-houses in the country... The extent and easiness of this inland navigation was probably one of the principal causes of the early improvement of Egypt.

--- Adam Smith, Book 1, Chapter 3. The Wealth of Nations

After months of delays caused by the global coronavirus pandemic, African countries began trading officially under the African Continental Free Trade Area (AfCFTA) on New Year's Day 2021. Every African country - apart from Eritrea - has signed on to the framework agreement and 34 have ratified it. Although the launch is largely symbolic with full implementation of the deal expected to take several years.

The new continent-wide free trade area (FTA) aims to create a single market of 1.3 billion people, facilitate the cross-border movement of people, goods and services, and investments, and establish a $3.4 trillion economic bloc, which will be the largest FTA since the founding of the World Trade Organisation.

In order to boost the trade within the continent, member countries plan to remove 90% of tariff lines. Compared to other regions, the intra-trade level in Africa is significantly lower. Between 2015 and 2017, intra-African exports and imports averaged around 2 percent compared to 47 percent in America, 61 percent in Asia, 67 percent in Europe, and 7 percent in Oceania [the East Asia/Pacific region], according to the United Nations Conference on Trade  and Development (UNCTAD).

Unlocking intra-regional trade is central to African economic growth. According to World Bank estimates, the free trade agreement will boost intracontinental exports by over 81%, exports with non-African countries by 19%, and could lift tens of millions of Africans out of poverty by 2035.

While the AfCFTA holds much promise for boosting socio-economic development in African countries, several historic challenges must be overcome if the bloc is to reach its full potential. One of such obstacles is Africa’s lack of regional connectivity due to poor transport and logistics infrastructure, which is sure to hinder the free flow of goods, services and people across neighbouring countries on the continent.

Infrastructure deficits and fragmented supply chains

The challenge of moving goods around Africa is not a problem new to the continent and now represents a major factor hindering the prospects of the AfCFTA, particularly in forming regional manufacturing supply chain clusters. Africa’s huge infrastructure gap, particularly for transport, as well as the fragmentation of supply chains have significantly hampered regional trade and economic integration for decades.

Although some parts of the continent - neighbouring countries in the East African region to be precise - are doing far better with cross-border trade and movement, the majority of African countries have ranked low on indicators such as cross-border clearance processes; quality of trade; infrastructure; inconsistent tax regimes; and consignments’ track and trace mechanisms, according to the World Bank’s Logistics Performance Index. Only South Africa ranks among the top 50 (33rd) globally as of 2018.

Digitalisation in the logistics sector in Africa is helping to address some of these challenges and in addition, the proliferation of digital logistics startups - such as Kobo360 - have helped facilitate connectivity vital to the flow of goods within the region and across borders. But inadequate infrastructure remains a significant challenge.

Investment crucial for easy navigation across Africa under AfCFTA

Most of Africa lags global counterparts in coverage of key infrastructure classes, including road and rail transportation. For instance, a 1,000-kilometer journey reportedly takes about six days in Africa compared to 48 hours in other parts of the world.

The problem has lingered for decades and is compounded by the fact that African governments are not sufficiently investing in connectivity and infrastructure, although there have been efforts to address this in recent years. In 2012, African heads of state and government endorsed the Programme for Infrastructure Development in Africa (PIDA), an ambitious long-term plan for closing Africa’s infrastructure gap, consisting of over 400 projects, including 236 for transportation.

Furthermore, a McKinsey report notes that there has been a steady increase in infrastructure investment on the continent over the past 15 years, and international investors have both the appetite and the funds to spend much more across the continent, but Africa has had a challenge of moving projects to financial close, with 80 percent of infrastructure projects failing at the feasibility and business-plan stage.

The report further adds, on what it terms “Africa’s infrastructure paradox”, that there is need and availability of funding, together with a large pipeline of potential projects, but not enough money is being spent. According to the Infrastructure Consortium for Africa, $81.6 billion of investments were committed to infrastructure development in Africa in 2017, 41.7 percent of which went to transport projects. However, this figure is still far short of the $130-$170 billion per year to 2025 needed to close Africa’s infrastructure gap.

According to UNCTAD, one reason for this lack of adequate investment in infrastructure and connectivity in Africa is that development banks in the region remain undercapitalised. For instance, the East African Development Bank only has assets of $390 million while the largest on the continent, the Development Bank of Southern Africa, is valued at $5.3 billion. The continental African Development Bank (AfDB) has total assets valued at under $50 billion, which is significantly far off the Asian Development Bank’s over $271 billion in total assets.

With the enforcement of the AfCFTA, the urgency for infrastructure development in Africa is even more compelling. The continental trade agreement seeks to create a single market for goods and services, and thus provides an opportunity for African governments to actively confront the transportation and logistical challenges that have long plagued intra-regional trade and movement on the continent.

Making AfCFTA work requires easy intra-Africa navigation - a non-restricted flow of goods, services, and people within and across national borders. To reverse the enormous problem of infrastructure deficits and the fragmentation of supply chains, massive and strategic investments in connectivity and infrastructure are needed but without increasing the risk of  debt distress.

There is also plenty of room for the private sector to play an increased role in the funding of the continent’s infrastructure development. Of the $81.6 billion invested in 2017, the private sector accounted for just 2.8 percent compared to 42.1 percent from national governments, 23.8 percent from China, and 24.1 percent from bilateral donors, multilateral agencies and African institutions.

African governments need to urgently mobilise the continent’s financial resources to finance the regional infrastructure needed to make AfCFTA a game-changer it has been much-touted to be. Without this, the continent-wide agreement is sure to be constrained by the gap in transport infrastructure and trade integration in Africa will remain a pipe dream for the foreseeable future.

As the world continues to recover from the disruptions of the COVID-19 pandemic, coping mechanisms such as increased use of virtual workspaces, online marketplaces and e-governance have become the norm. While this presents opportunities to revamp economies and streamline public service delivery, it may also heighten exposure to cybercrime.

In Africa, many countries have seen a rise in reports of digital threats and malicious cyber activities. The results include sabotaged public infrastructure, losses from digital fraud and illicit financial flows, and national security breaches involving espionage and intelligence theft by militant groups.

Addressing these vulnerabilities requires a greater commitment to cybersecurity. This requires enforceable policy safeguards, risk prevention and management approaches, along with technologies and infrastructure that can protect each country's cyber environment, as well as individual and corporate end-user assets.

However, the latest Global Cybersecurity Index (GCI), released this June by the International Telecommunication Union (ITU), suggests Africa's levels of commitment to cybersecurity – as well as capacity for response to threats – remain low compared to other continents.

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The dawn of the COVID-19 pandemic affected the globe with its far-reaching impacts. Even though the long-term health, economic, and social impact is still indeterminate, the immediate effects have ensued with significant loss of lives and livelihoods. Those already living in poor and vulnerable conditions have been the hardest hit, suffering extreme hardship from reduction in income and decreased consumption, since existing coping mechanisms are grossly inadequate to counter the shocks from the pandemic. This scenario is bound to threaten their chances of survival, plunge them further into extreme poverty as well as expand the inequality gap. As a result, the importance of investing in efficient social protection programmes has never been more pronounced.

Micro, small, and medium enterprises (MSMEs) in Africa have been particularly vulnerable to the economic impacts of the COVID-19 pandemic, with demand for their products and services declining since the outbreak in late 2019. A recent African Union report that surveyed African SMEs about COVID-19’s impact on their businesses reported that the pandemic had heavily impacted 93% of businesses, while 95% of them did not receive any form of government support to cushion the impacts of the economic downturn. In a survey of MSMEs in Nigeria by the Centre for the Study of the Economies of Africa (CSEA), 69% of respondents said the pandemic had significantly affected their access to finance, capital and financial liquidity. Total direct output loss accruing to Nigerian MSMEs in the year 2020 was estimated at about NGN5.8 trillion (U$D 14.85 billion).

At the same time, the COVID-19 crisis has accelerated the adoption of digital technologies across the world. The lockdown restrictions created a rare opportunity for many MSMEs and households to engage with digital technologies, allowing businesses to stay operational and access new markets. Unfortunately, given the enormous digital divide in terms of skills and infrastructure, the benefits of this digitalisation have been unevenly distributed.

Digitalisation and COVID-19 recovery

MSMEs play an essential role in the overall growth of the industrial economy of Africa. They constitute about 95% of African businesses and contribute 80% of regional employment. Therefore, they are a vital industry for inclusive socio-economic development. The rapid migration to digital technologies as a result of COVID-19 has continued into the recovery phase in Africa, and augmenting MSMEs’ capacity and ability to keep pace with the new digital expectations that have emerged will be critical to driving COVID-19 recovery on the continent. However, only a few MSMEs capable of navigating and integrating into digital platforms may survive the prolonged effects of the crisis. Many firms are not capable of embracing digital initiatives, particularly in the informal sector. Differences in technological, social and networking capabilities further exacerbate the digital divide.

Digitalisation’s potential contributions to MSME survival include wider customer reach, cost reduction, and opportunities to optimise products, sales and revenue. Social media platforms such as Facebook and Instagram are now being used to interface directly with customers and effectively acquire new ones. MSMEs should efficiently market their products and services for social media platforms, which have an estimated user base of over two billion users, while reducing traditional overhead costs and technically reducing the distance between MSMEs and their customers. MSMEs can also leverage digital innovations for survival by restructuring their enterprise towards remote working, migrating to e-commerce and reorganising their production lines towards goods and services with higher demand.

Beyond COVID-19, however, digitalisation provides the opportunity for MSMEs to leverage the benefits of the recently implemented African Continental Free Trade Area (AfCFTA). Symbiotically, the AfCFTA delivers a channel for the region's fragmented countries to band together to seek alternative paths to development by harnessing combined strengths and resources to support digitalisation.

"There is a concern about whether the AfCFTA will ensure an equitable spread of digitalisation gains. This will depend on how it responds to competition, antitrust and cross border taxation arising from the digital economy."

Leveraging the AfCFTA

While more than 500 million Africans (39% of the total population) are connected to the internet, the spread and scope of digitalisation have not translated to economic development and structural transformation on the continent. One reason for this is the small economic size of many African countries and their fragmented nature. Individually, most African countries lack the economies of scale and investment capacity needed to drive down costs and mobilise mass adoption. This also partly explains the weak and uneven development of domestic digital platforms in Africa. Regional integration can alleviate these problems by promoting investment in aids to trade, of which digital technology is a key component. With the AfCFTA, the continent becomes a single market, thereby diminishing economic size and fragmentation issues.

Regional integration also has the potential to resolve another constraint to widespread digitalisation in Africa: citizens’ weariness of the potential abuse of digital platforms for surveillance and restrictions on their constitutional rights. Given the role social media played in the Arab Spring, there have been many attempts by African states to shut down the internet or control access to the digital space in response to protests or dissent. In 2019, about 25 cases of partial or total internet shutdowns were documented in Africa, representing a 47% increase from 2018. Given this trend, expansion in digital footprints like digital identification systems and facial recognition has faced scepticisms and outright rejection from citizens and civil society. Regional integration can help in this regard. The uniform data governance that is likely to ensue within the free trade area will separate business cases for digitalisation from the political ones. Moreover, regional integration will make it economically costly for states to arbitrarily shut down the internet, as this will have broader continental effects.

However, for the benefits of AfCFTA to accrue inclusively, it is essential to narrow the uneven development of digitalisation in Africa. Some of the recent growth in domestic digital platforms in African has been concentrated in a few relatively rich countries like Nigeria, South Africa and Kenya. Therefore, there is a concern about whether the AfCFTA will ensure an equitable spread of digitalisation gains. This will depend on how it responds to competition, antitrust and cross border taxation arising from the digital economy.

Supporting digitalisation of MSMEs

National governments at both the federal and state level can enhance the digital capabilities of MSMEs by promoting programs that facilitate the adoption and use of digital technologies. Governments, the private sector and the civil society need to collaborate and facilitate knowledge flows that contribute to building and strengthening a systemic digital change. The first steps would be to identify the gaps that hinder digital take-up and provide context-specific solutions that bridge the identified gaps. While the priority of crucial challenges will differ by country, the following policy measures must be pursued cross-nationally:

● Digital skills training: Digital literacy skills are fundamental to achieving digitalisation. There needs to be an intentional effort to prepare current and future business owners to succeed in this changing landscape. This includes training that provides MSMEs with a holistic understanding of digitalisation and equips them to actively and fully engage in it. Particular attention should also be paid to tailoring programs to the needs of women and girls.

● Provide infrastructural support: It will be critical to promote technology-enabled interventions that facilitate access to mobile phones, tablets and computers that enable MSMEs to adopt and access digitalisation. Policymakers will need to back this up with complementary investments in physical infrastructures, such as improved electricity supply and support for software development and assembly of ICT equipment and accessories. It is also imperative to extend improved internet connectivity to rural areas and underserved population.

● Reduced cost of digitalisation: Many businesses are already faced with devastating financial consequences of the COVID-19 pandemic. As MSMEs will incur expenses as they digitally transform their businesses, they should be encouraged and incentivised to start with low-cost pilots and little resources that can be scaled up. A recent survey of 45 African countries shows that only 10 countries meet the standard of affordable internet, defined as paying 2% or less than the average monthly income for 1 gigabyte (GB) of data. It is critical to align the costs of digitalisation with the ability of Africans to afford it. Such a reduction in the costs of digitalisation could come through crisis-response partnerships with telecommunications providers. For example, lower data costs could encourage MSMEs to participate in online digital literacy and migrate to e-commerce. Other African countries should embrace the success models of Kenya and Nigeria. Through the internet exchange gateway, the Kenya Internet exchange points (KIXP) grew from carrying peak traffic of 1 Gigabit per second (Gbps) in 2012 to 19 Gbps in 2020. The Internet Exchange Point of Nigeria (IXPN) grew from carrying 300 Megabits per second (Mbps) to peak traffic of 125 Gbps in 2020, bringing a cost savings of US$ 40 million per year.

● Improve Public-Private Partnerships (PPP): It is imperative to strengthen public-private partnerships, particularly in the financial and telecommunications sectors, in delivering the needed interventions. Governments and private technology firms could pull resources and technical know-how to make internet data and ICT facilities affordable, which could be a cornerstone for MSMEs to adopt and utilise digitalisation. Such public-private partnerships hold the key to the future development of MSMEs by enhancing digital literacy among MSMEs, reskilling and upskilling their potentials to compete effectively in AfCFTA. Morocco has exhibited an excellent PPP model for digital transformation through its 2020 Digital Strategy, prioritising the development of e-government services.

Digitalisation can support African MSMEs to emerge from the COVID-19 crisis stronger with an unparalleled global competitive advantage when adopted and applied efficiently through the AfCFTA. Therefore, it is time for governments and policymakers to prioritise long-overdue reforms in African business regulations, skills development schemes and public sector governance.

This article was first published on the African Portal

Tariff reform is often listed as a high-priority issue in Nigeria. In March 2020, the Nigerian Electricity Regulatory Commission (NERC) issued an order to transition from demand-based to cost-reflective and service-reflective tariffs. Consumers are now supposed to pay based on how long they receive electricity daily, divided into groups commensurate with the quality of services offered. After several delays due to COVID-19, this change finally took effect in September 2020.

Nigeria’s new tariff structure intends to deliver:

• Financial sustainability. Reduced tariff shortfalls are expected during the transition. In 2020, the Federal Government reportedly spent about ₦380 billion (US$960 million) on electricity subsidies to cover the shortfalls, but aims to reduce this to ₦60 billion in 2021.¹

FIGURE 1: Projected Revenue Requirement, Allowed Revenue Recovery and Tariff Shortfall in 2020 (Data was sourced from NERC, 2020).

• Improved service quality. Distribution companies (DisCos) will be assessed on the basis of availability (hours of supply), reliability (frequency and duration of interruptions), and quality (voltage and operating frequency). The re-designed tariffs aim to ensure that consumers who receive fewer than 8 hours of electricity per day do not see tariffs increase until quality improves. The more hours of service provided, the more cost-reflective, meaning DisCos are incentivized to improve service and transition to full cost recovery. DisCos are required to cluster customers with an agreed quality of service and a service-reflective tariff for each tariff band. Any service level agreement will also include compensation to consumers if DisCos fail to meet performance targets.

TABLE 1: The new service-reflective tariff bands (Data sourced from NERC, 2020).

Though some challenges remain:

• The metering gap. Only 38% of Nigeria’s 10 million active electricity consumers have meters to measure actual consumption and quality. The other 62% have been billed on estimations, although they will now receive capped bills to encourage DisCos to install more meters and reduce the risk to consumers of over-billing. NERC is discussing, with DisCos and meter providers, revisions to regulations and service level agreements to reduce the burden of over-estimated capped bills on consumers through more metering. The COVID-19 pandemic has however stalled the metering scheme and impacted the availability of imported components for local assembly of meters.
• The need for stronger transmission and distribution (T&D) infrastructure. Crumbling T&D infrastructure is a perennial issue in Nigeria. Constant faults and outages degrade supply quality and in turn dramatically lower revenues and customer confidence. The Transmission Company of Nigeria (TCN) has been directed to resolve bottlenecks at T&D interfaces, including frequent faults at the 132/33kV substations. DisCos are required to provide smart meters to their 11kV and 33kV feeders to send real-time data to the TCN for monitoring purposes. New tariff-quality linkages aim to provide a push to these measures.
• The COVID-19 pandemic. Nigeria is in recession, while government steps to alleviate the economic impact of the pandemic are further stressing the power sector. The financial strain of COVID-19 has impacted the purchasing power of consumers and decreased electricity demand across the economy. DisCos and other operators in the electricity supply value chain are also feeling the effects of inflation and exchange rate volatility. While service-reflective tariffs are a step in the right direction, the broader macroeconomic crisis will create major headwinds for the sector for the foreseeable future.

This article was first Published at Energy for Growth Hub