Effect of Transportation Networks on AGOA
The road infrastructure in Africa for the whole region is smaller than that of a small country such as Poland. Compared to South East Asia, SSA rail freight costs are 200% more and this makes sourcing more complex. This statistic explains why transportation costs make up about 70% of the total costs of a product. Landlocked countries have a 50% higher transportation cost than coastal countries making the total costs of production even higher.
Prior to the African Growth and Opportunity Act of 2000 (AGOA) trade between Sub-Saharan Africa and other regions existed mainly with France. There was almost no broad trade policy that existed between America and until the AGOA law was signed. America saw the potential for sourcing energy and textile products and auto parts from the region. Transportation networks of Sub-Saharan Africa were drawn up during colonial era and were done on a country to country basis and also on a regional basis where Francophone country traded with only Francophone countries.
The English speaking territories of Africa had better rail and road networks than the Francophone one because funding was so difficult because the French did not want to fund colonial transportation networks. The lack of political will to fund these projects in French colonies resulted in the removal government subsidies and make colonies responsible for their own infrastructure. The transportation networks remain national however; there are now talks to develop regional networks under agreements such as West African Economic Monetary Union (UEMOA).
The shape of the continent of Africa coupled with the different climate zone makes it more difficult to transfer technology across the continent and this hinders development. Transportation policies are still national and therefore a disadvantage for landlocked countries that are faced with high tariffs as they cross borders making their exports more expensive compared to other regions of the world. There is need for broad based regional policy development to address this issue.
Other factories such as relative small number of rivers mean that irrigation cannot take place outside the rainy season. Disease has reduced productivity as well as the high level of transaction cost. There are fewer entrepreneurs and taxation is high and all these factors make it difficult to source from Africa.
Transportation costs studies have been on the increase due to globalization. Low transportation costs have led to American companies sourcing from overseas markets. In the case of Sub-Saharan Africa (SSA) however; this has not been the case. Studies show that although there was a decrease in transportation costs in average unit transportation costs have remained unchanged. The reduction in transportation costs worldwide has resulted in outsourcing to low cost sub-contractors.
There is no broad policy to address high freight costs and delays at African ports. An increase of 1% in infrastructure will result in 0.14% reduction in transportation costs. There are many different rail gauges which make it difficult to standardize and move rail cars from one network to another. SSA should expand its network to be able to establish business with Asia and use Dubai as hub for air transportation to Asia and U.S.
The road infrastructure in Africa for the whole region is smaller than that of a small country such as Poland. Compared to South East Asia, Sub-Saharan Africa (SSA) rail freight costs are 200% more and this makes sourcing more complex. This statistic explains why transportation costs make up about 70% of the total costs of a product. Landlocked countries have a 50% higher transportation cost than coastal countries making the total costs of production even higher.
The absence of inter-modal transportation network has led to high truck transportation costs. Most US companies purchase products from places that are less than 3,000km away while SSA countries are landlocked and more than 3,000km away making transport costs higher. The low level of urbanization has led to the most markets for goods and services being located far away from where they are made increasing transportation costs.
Transportation costs are very high due to inefficiencies in processing at ports causing delays and increasing costs by 0.8 cents per day, adding to the total cost of the item that is being sourced. The presence of monopolies and the absence of competition in the market place make intra-continent shipments more expensive than international shipments. The result is that there are few markets for products produced in SSA and consequently exports are more expensive therefore there is need to improve infrastructure.
Other barriers to trade in SSA have been political instability due to civil wars. African Growth and Opportunity Act (AGOA) considered this problem therefore one of the conditions of AGOA is that a country move towards democracy. The significant barrier to transportation in West Africa has also been the presence of public-private owned companies whose goals are to just provide service and not create profits. These inefficiencies and mismanagement make it more difficult to source products from SSA because maintenance of fleet is difficult.
The dollar amount of goods imported from SSA was $104.6 billion in 2008 which was triple the amount in 2001. This figure seems good but the projections were anticipated to be higher when the AGOA law was first signed in 2000 by President Clinton of the United States.
Sources: (Naude & Mathee, The Significance of Transport costs in Africa, 2007)
(Akpoghomeh, 1999)