Africa and infrastructure: Charting the way forward
Historic trade agreement must be supported by increased investment to allow full realization of its goals
With Nigeria and Benin signing the African Continental Free Trade Agreement (AfCFTA) in July 2019, 54 of the 55 African Union member states have become part of the Africa Continental Free Trade Area, the largest in the world by number of countries after the World Trade Organization.
The goal of the agreement is expanding intra-African trade and creating a single continental market for goods and services. This will include free movement of business persons and investments and the eventual establishment of a continental customs union. It also aims to enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better resource.
The Free Trade Area will encompass a combined population of 1.2 billion people and a combined GDP of over $3.4 trillion. Its total population is expected to double by 2050 according to recent United Nations forecasts. With an expanding middle class – about 43% by 2030 – there will be a significantly higher demand for goods and services. Africa’s combined consumer and business spending is expected to reach $6.7 trillion by 2030.
Creating a single continental market for goods and services makes Africa a powerful economic force and a prized investment destination. For General Electric Co. (GE) and a number of private-sector players both regional and multinational, this is great news. Over the years we have made efforts to localize our supply chains and encourage global GE suppliers to invest in Africa. Free movement of goods, services and people across the continent makes this a huge opportunity and a considerably more attractive proposition.
The AfCFTA aims to drive intra-African trade, which in 2018 stood at 16% of total African trade. If properly implemented this could potentially increase 52.3% by 2022, the United Nations Economic Commission for Africa (UNECA) has said. Considering that 42% of intra-African trade is made up of manufactured goods, such a significant increase could lead to increased industrialization opportunities and growth of the manufacturing sector, creating employment and increasing prosperity.
Infrastructure development would play an important role. On the one hand, the AfCFTA provides new opportunities for investment in infrastructure. On the other hand, significant investment in developing infrastructure will be critical to its success. The African Continental Free Trade Area creates an urgent need for connectivity between African countries. This means new opportunities for infrastructure investment in transportation; information and communications technology ICT; adequate road networks; and aviation, among others.
Significant investments in power generation and distribution would be required to develop and sustain industrialization. Currently 600 million people in Africa lack access to electricity according to the Africa Energy Outlook 2019 Report. Africa is currently investing about $9 billion a year in electricity but an additional $44 billion investment is required to meet annual demand.
Faced with a quarter of the global disease burden and a fast rise in non-communicable diseases, healthcare will largely benefit from common regulatory environment. Quality and safety standards enabling the industry and clinical providers to expand their reach across borders will leverage a much larger critical mass to justify investments.
Medical tourism is one of the few industries that already enjoys intra-African trade above that of countries outside the continent. Investment in healthcare could enhance regional medical tourism and induce supply of quality and accessible healthcare services supporting African countries in their aspiration for universal health.
The private sector, multinationals in particular, must commit to building a local supply chain and developing local partners. Local companies can bring distribution, financing, technology, access and many other benefits. We must also commit to local hiring and managerial training. It is important to have strong African leadership and expertise in companies. It could be the difference between success and failure.
At GE Africa, 90% of our leadership team is African. It ensures an appropriate understanding of the landscape, risk assessment and mitigation and cultural issues. Most importantly, it shows commitment. The private sector can help increase the quantity and quality of the local skills base.
Sub-Saharan Africa has a huge opportunity to boost growth, create jobs and improve social stability thanks to a burgeoning population that will be home to 25% of the under-25 global population by 2025. Though this presents an incredible opportunity for the region, the path to unlocking the potential of this demographic dividend requires investment in skills to develop infrastructure and bolster the manufacturing and services sectors.
Financing is the key to fixing the infrastructure needs in Africa. While improved engagement from lenders and investors in Africa has taken place over the last decade, the level of credit enhancements or guarantees required to balance perceived or tangible risks is still hindering a fast financial closure cycle. Local banks have often stepped into this void but their capacity is limited. More accessible and increased credit enhancements and guarantees would play a big role in accelerating investment in infrastructure across Africa.
African governments also have a role to play. Investment in infrastructure must be prioritized. Processes should be simplified, predictable and quicker to attract infrastructure investment. It is important that investors have greater confidence that changes in government administrations will not jeopardize contracts and projects already in place, that new administrations would honour and recognize them. This would help alleviate some of the political and economic risk of projects for the financial community.
The AfCFTA provides an unprecedented platform for economic growth of the continent. Effective implementation of the different aspects will determine its overall success.
The African Union has the important role of ensuring shared prosperity and inclusive growth across all countries. Though it is likely that some countries will benefit more than others at the start, each will have access to a much larger market and opportunities to demonstrate its comparative advantages.
Significant investment in infrastructure is a key element of success for the AfCFTA. As access to cross-border electrification, healthcare, transportation, telecommunications, agriculture and digitization increases we unlock the full potential of sustainable growth, collaboration and shared prosperity.