AfCFTA presents an opportunity for SA service companies
- Sören Scholvin, Ivan Turok and Justin Visagie
Navigating non-tariff barriers and regulatory challenges
President Cyril Ramaphosa officiates at the launch of SA's first shipment and preferential trading under the African Continental Free Trade Area (AfCFTA).
Global trade wars and protectionist policies have raised hopes that the African Continental Free Trade Area (AfCFTA) will enable South African firms to diversify into African markets. Indeed, the service sector is an explicit focus of the AfCFTA, which aims to create more accessible markets through its Protocol on Trade in Services.
A more integrated, continent-wide market for services would enhance competitiveness in all member countries through economies of scale, reduced trade costs and improved resource allocation. The AfCFTA could ultimately evolve into a division of labour based on the comparative advantages of each country. Our recent research analyses the prospects of regionalisation for South African service firms, revealing both opportunities and constraints.
The importance of services should not be underestimated. Manufactured goods are increasingly sold together with services such as after-sales support: maintenance, training and the like. So the competitiveness of manufacturing companies reflects good services. In South Africa, the service sector has come to dominate employment and GDP over the past 35 years, at the expense of manufacturing and mining. Manufacturing has become highly capital-intensive and saturated by global competition. Large-scale job creation, therefore, depends on services — directly through service industries and indirectly through manufactured goods bundled with services.
Africa’s young population and rapid urbanisation translate into demand for services. South African service providers such as MTN, Imperial Logistics and Standard Bank already have a big footprint across the continent. Mining is closely integrated with suppliers of capital goods and related services from South Africa. Besides these well-known cases, there are many other South African companies that have successfully expanded into Africa, driven by growth prospects and the conviction to understand African markets. They cover sectors as diverse as education, fintech and freight forwarding. Ghana, Kenya and Nigeria are important target markets beyond the Southern African Development Community (Sadc).
Yet, African markets for services are still in their infancy. Export data indicate that they are dwarfed by Asia, Europe and North America. Regionalisation is not a viable alternative to participation in global value chains and related processes of offshoring and outsourcing, at least not right now. Nonetheless, African markets have attracted more and more investment by South African firms. Our research shows that to start operations, they typically send South African expats or hire local executives. Smaller companies sometimes engage in-country business partners, who can represent them to customers. Having feet on the ground is essential to understand markets and adapt business practices accordingly. Flying executives in and out or providing services remotely is not sufficient to consolidate business activities.
"Export data indicate that they are dwarfed by Asia, Europe and North America. Regionalisation is not a viable alternative to participation in global value chains and related processes of offshoring and outsourcing, at least not right now."
Many South African firms have found African markets difficult to succeed in, and, in some cases, they have withdrawn. Shoprite is a prominent example. Despite the successes mentioned earlier, the overall picture is mixed. Easy target markets such as Namibia are quite different from challenging ones such as Ethiopia. Some service sectors like logistics have plentiful short-term opportunities, whereas business consulting, software and IT seem to be more difficult nuts to crack.
There are many challenges. While tariffs are not, usually, a primary concern, there are substantial non-tariff barriers that need to be eased. The AfCFTA could play a useful role here. Regulatory barriers hamper investment in services. They include professional accreditation, licences to operate and technical specifications — often used to protect local companies. Visa and work permits are notoriously difficult to get. Bringing in equipment and spare parts is time-consuming and expensive because of customs procedures. Another issue that the AfCFTA could address is financial flows. At the moment there are strict controls on the repatriation of profits and the transfer of funds between countries.
AfCFTA is an opportunity to grow the potential of African service markets and service-led development.
The AfCFTA could, moreover, set up institutions to facilitate business partnerships. South African firms often struggle to find local suppliers. They lack access to local networks and market intelligence, especially in countries with high levels of informality, fraud and scamming. If South African firms worked with local suppliers, the costs of operating abroad would drop. There would be substantial benefits for the suppliers too, as they would not only increase their revenues but possibly upgrade their products and production processes to meet higher standards. The same ideas apply to hiring local staff.
Of course, not all problems can be solved by the AfCFTA, and we warn against unrealistic expectations. Success in Africa requires long-term commitment. South African firms are not always well prepared. Their top executives are not familiar enough with the unique operating conditions in other countries. They lack essential information or are guided by misconceptions about the size and level of development of markets. Unpredictable and sudden policy changes, as well as language barriers and poor flight connections beyond Southern Africa are further obstacles. Currency volatility in resource-exporting countries such as Nigeria can literally evaporate profits as these are converted into rand or dollars.
Regionalisation will concentrate on a limited number of relatively attractive target markets. South African firms refrain from investing in many countries that are considered too corrupt, inefficiently regulated, undeveloped and unstable. Eritrea, Gabon and Libya are extreme cases, though some Sadc members also suffer from disincentives to investment, including currency volatility and frequent power cuts in Zambia.
All things considered, we think that the AfCFTA is an opportunity to grow the potential of African service markets and service-led development. It can complement service exports to Europe and North America, but further action is required to overcome significant obstacles.
Scholvin is an affiliate at Policy Research in International Services & Manufacturing (PRISM), School of Economics, University of Cape Town. Turok is NRF chair in city-region economies at the University of the Free State. Visagie is a professor at the Southern Centre for Inequality Studies, 91心頭利.