The Infrastructure Paradox
Hey there, Justin here. This week, we published episode four of season three - Journey to the Last Mile. Each week of the season, The Flip Notes will cover a corresponding topic to the episode just published. Today, we're talking about logistics and infrastructure.
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The Infrastructure Paradox
This week we published our exploration of the logistics value chain - Journey to the Last Mile - in which we follow a product from the port to the last mile. At every layer of the value chain there are technology companies helping to better organize and optimize what is without question an otherwise analog and inefficient industry.
And it's an important endeavor. Goods in Africa are disproportionately higher than in other regions of the world - many Africans spend 50% or more of their household income on food alone - and a primary culprit is inefficient logistics.
But as we produced this logistics episode, a prickly question percolated in the back of our minds - what about infrastructure?
In Lagos, for example, trucks wait for two weeks or more to load or unload their cargo at the port in Apapa. While it's a multi-dimensional issue, it's an issue that is large in part due to insufficient infrastructure.
Two weeks ago, in TFN #75 - after our multi-part podcast series on fintech - I wrote about the tremendous and burdensome amount regulatory fragmentation on the continent, and the degree to which regulator engagement and collaboration is of paramount importance. In financial services, we need more fintechs scaling across the continent AND we need greater regulatory harmonization, if we are to reach our financial inclusion objectives.
Likewise, if the cost of goods are ultimately going to be reduced, so too do we need startups better organizing and increasing transparency across the value chain AND we need better infrastructure. And we really need better infrastructure.
This week's episode on logistics starts at the container port. Ports are vitally important to a country's economy. Not only do they handle 90 percent of all goods traded internationally, but according to Marc Levinson's The Box,
A country cursed with outmoded or badly run ports is a country that faces great obstacles to finding a larger role in the world economy. In 2004, the World Bank estimated that if Peru were as effective at port management as Australia, that alone would increase foreign trade by one-quarter. The Peruvian government took that warning seriously, arranging $2 billion in port investments over the ensuing decade, which made possible a very large increase in foreign trade. Tanzania, on the other hand, staunchly resisted modernization. If only the port at Dar es Salaam had been as efficient as the nearby port at Mombasa, the average Tanzanian family in 2012 would have saved a stunning 8.5 perfect of its annual expenses.
An inefficient port has a downstream effect on the cost of goods, and the wait times to clear cargo through African ports are the longest in the world. As Miishe Addy, the Co-founder and CEO of Jetstream Africa, explained,
There's a big problem around documentation... Shipping lines charge a type of fee called demurrage, which is basically a storage fee. So if you don't pick up your cargo within an alotted time, they charge you rent. Only about 20% of the containers that come into Ghana are actually cleared before they start hitting demurrage. It's so common that even in a port like Ghana, where the roads are good, the infrastructure is fabulous, you can physically move a container in and out within 24 hours, the paperwork issues cause a lot of the containers to back up anyway.
While efficiency in the event of sufficient infrastructure is a problem, the insufficient infrastructure problem is staggering. The African Development Bank estimates that the continent’s infrastructure financing needs will be as much as $170 billion a year by 2025, with an estimated gap of around $100 billion a year. This includes financing not only roads and ports, but water, electricity, and more.
It's not that there isn't interest in financing infrastructure in Africa. According to McKinsey, "Africa’s current pipeline of infrastructure projects includes $2.5 trillion worth of projects estimated to be completed by 2025". However, 80% of these planned projects fail at the feasibility and business-plan stage. McKinsey calls this the "infrastructure paradox": there is funding, a large pipeline, and a need for spending, but not enough money is being spent.
But a recent success story was announced earlier this month - that Dubai ports operator, DP World, and the UK's development finance agency, CDC Group, have partnered on a $1.7 billion joint venture to modernize and expand three ports run by DP World, in Dakar, Berbera, Somaliland, and Ain Sokhna, Egypt. That such a sum is being invested in just three ports gives us a better idea of the size and scope of Africa's infrastructure deficit at the port and road level, as well.
The size and scope of Africa's infrastructure needs - and the multitudes and complexities of stakeholders involved in bringing such projects to life - is far beyond the scope of this discussion. But I wonder, cautiously, to what extent tech has a role to play in the development of African markets from an infrastructure perspective.
On one hand, there is a role for innovation, in particular in the context of sectors like off-grid solar, which enable the delivery of electricity via distributed and localized grids. On the other hand, there is a value to greater efficiency and transparency made possible by technology, which further de-risks investments and/or makes SME financing possible.
Then, there's simply tech companies finding ways through these wicked problems. As Kobo360's Obi Ozor discussed with the IFC,
“Like most frontier markets, we need better roads,” said Ozor. “This is one of the things that keeps me up at night, even though there’s nothing a start-up like ours can do about this.” A 1,000 kilometer journey normally takes about six days in Africa, in contrast to 48 hours in other parts of the world, he said.
The enormity of the infrastructure problem has prompted him to come up with original solutions. “We’re looking into cargo drones, we’re looking at inland waterways and ports that haven’t been used since the colonial days,” Ozor said. The company has already acquired a license to use barges for some cargo transfers.
Although Ozor believes government regulatory policy and sector-wide reform would build investor confidence, he’s not waiting for someone else to construct a sturdier logistics sector for Africa. He’s fleshed out a proposal for a national Transportation Trust Fund, whereby a small percentage of each trip would staff rescue operations, develop intermodal transport options, and build national driver training academies. Including drivers’ well-being and job satisfaction in his strategy is essential because “logistics is human,” he says.
I remain optimistic of the role technology plays in the development of emerging markets, including the logistics sector. And I remain optimistic of the ability of African entrepreneurs to solve hard problems. But no discussion of fintech, especially cross-border, should occur without also talking about the need for regulatory harmonization, and no discussion of technology in logistics can occur without also talking about Africa's infrastructure deficit.
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