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The East African : January 27th 2014
44 The EastAfrican BUSINESS JANUARY 25-31,2014 What ails Af≥ican ca≥≥ie≥s, making ai≥ t≥anspo≥t expensive on the continent? COMMENTARY LEE CRAWFURD “Challenges range from strong State protectionism, high taxes and charges, a poor safety record and insufficient regulatory supervision.” W hen thinking about regional integra- tion in Africa, we often think first of trade policy, telecommunications, ICT, and road infrastructure. But on a continent larger than China, India, the US, and Europe combined, air transport is inevitably going to play a key role in facilitating integration. For Africans to interact and do business with each other, they need to get there. Moreover, as incomes rise, patience with long and arduous road journeys is bound to diminish. However, Africa accounts for less than two per cent of global airline passenger traffic and about one per cent of global airlines’ cargo. The challenges facing the African aviation industry range from state protectionism and lack of an enabling environment for new investors to high taxes and charges (above comparative world averages) and a poor safety record due to ageing fleet and insufficient regulatory supervision. Likewise, a lot of air transport infrastructure across the continent is in need of upgrading. So how do we get safer, more efficient and cheaper airlines? One of the key problems is a lack of competition, which contributes to high fares. Although in some cases low passenger volumes may create natural monopolies, in many countries competition is artificially restricted by making it difficult for foreign airlines to access certain routes, in order for governments to support their own national carriers. This is despite an agreement more than 13 years ago to “open the skies.” The Yamoussoukro Decision (1999) was signed by 44 countries, who agreed to liberalise intra-African air transport, including allowing non-national airlines to land and take passengers to a third country — so-called “fifth freedoms” of the air. Implementing this decision could do much to reduce fares and increase air traffic across the continent. All of this sounds fine in the- ory, but what about in practice? A comprehensive 2010 World Bank study led by Charles Schlumberger looked at a number of specific examples of what has happened when routes have been liberalised in Africa. When the Nairobi-Johannesburg route was fully opened up in 2003, passenger volumes increased 69fold. When the domestic South African market was liberalised, passenger volumes increased by 80 per cent. On average in the Southern African Development Community (SADC), routes that were liberalised saw fares drop by 18 per cent. The study estimates that full liberalisation in the SADC region would increase passenger volumes by around 20 per cent. A more recent study was pre- sented at the AfDB’s African Economic Conference by Megersa Abate, an Ethiopian transport economist, looking at air transport routes to and from Addis Ababa. While Mr Abate did not find any impact of liberalisation on prices, he did find large increases in the number of flights — up to a 40 per cent increase. He concluded that in the long port minister noted the challenges that prevented financial viability of the national airline over the years. Achieving success, efficiency and profitability calls for smart partnerships with the private sector and strategic alliances within the sector. Global challenge The challenge of financial vi- ability and efficiency is not confined to Africa alone. Major European and American airlines have folded or receive billions of dollars in state aid, capital injections, and debt write-offs — demonstrating that the airline industry is fraught with difficulties. Moreover, developed and emerging markets have witnessed the growth of lowcost carriers that are allowed to compete on the same routes with the major carriers, thereby driving down prices. To be sure, low-cost carriers in Africa face a host of additional challenges including high costs due to poor safety records and slow courts, but implementing “open skies” would be one less thing for them to worry about. Lower airfares and more Lower airfares and more flights would generate a whole host of new economic opportunities.” run, competition is likely to reduce prices. Even without price drops, more flights and more routes are clearly needed. Despite these potential gains, at present over a quarter of air routes in Africa are served by only one carrier. In total, up to 70 per cent of air transport is served by a monopoly carrier. So why are countries slow to “open the skies”? Too often it comes down to simple protectionism, driven by fear that the national carrier won’t be able to compete with the continent’s big players from Kenya, Ethiopia and South Africa as well as other competitors from the Gulf and beyond. Earlier this year, it took the total collapse of Air Malawi for Kenya Airways to be allowed to operate flights between Malawi and other countries, despite “fifth freedom” rights already agreed to by Malawi through the Yamoussoukro Decision. Individual airlines and countries should not need to make ad-hoc bilateral agreements, when an agreement for open competition continent-wide already exists. In addition to restricting competition, many countries also provide generous subsidies to their national “flag” carrier. So in addition to limiting the number of flights available, governments then spend scarce resources propping up inefficient airlines. President Michael Sata of Zambia recently called for the establishment of a new national airline, while the former trans- flights would generate a whole host of new economic opportunities. The successful flower industries in Kenya, Ethiopia and elsewhere rely critically on air transportation, as do other similarly perishable agricultural goods. International tourism earned Africa $43.6 billion in 2012, and directly created eight million jobs. This could grow with increased and cheaper air transport. Cheaper air fares will also likely have social benefits, facilitating interaction between people of different cultures. Increased intra-African tourism may well contribute to the noneconomic aspects of integration goals, preparing the ground for stronger transnational feeling. Economists like to say that there is no such thing as a “free lunch.” But at the cost of some short-term political pain, Africa could gain some big economic and social benefits. Lee Crawfurd who blogs for the African Development Bank is a development economist at Oxford Policy Management Rwanda moves to ≥efo≥m ene≥gy secto≥, ≥educe on blackouts TURN FROM PAGE 43 ($73.4), which does not make economic sense because you canspend more than a month working on the same project. It also did not take into account the administrative costs incurred by the investor,” Mr Ndayisaba said, adding that installing a biodigester on average costs Rwf600,000 ($881.7). Rwanda exclusively depends on imported refined petroleum products to meet local demand. Oil imports now account for above 5 per cent of GDP, up from less than 2 per cent by 1998. The African Development Bank (AfDB) states that 40 per cent of Rwanda’s hard currency earnings go to petro- leum imports. Due to its current huge energy deficit, Rwanda’s electricity reserve margin is very low at approximately 0.9 per cent on average, well below the international norm of 15-20 per cent. However, this year, government expects an additional 65.5MW to be generated with the completion of ongoing projects, which include Nyabarongo I MHPP (28MW), Kivuwatt Methane Gas (25MW), Giciye MHPP (4 MW), and the IPP Solar PV power plant. “The projects will provide low cost power supply and increase grid stability,” Prof Lwakabamba said, adding that the state is investing in new generation capacity to ensure higher reserve margins and more reliable and low cost electric service. It will be second time the govern- ment is attempting reforms to attract investment. In 2003, the government gave Electrogaz which used to manage the electricity and water supply to a German company, Lahmayer International, to manage and restructure the body for five years. However, the contract was terminated after two years with the gov- 40pc ernment assuming full control in March 2006. Under government control, Elec- trogaz was split into two corporations: Rwanda Electricity Corporation, and Rwanda Water and Sanitation Corporation, though no tangible results were achieved from the process, forcing the government to again merge the two institutions into what is now EWSA. “Despite the reform, the govern- Amount of Rwanda’s hard currency earnings that go into petroleum ment will be the biggest shareholder. I don’t see any change. I think the problem is management: the government has to think about how the new energy company will be managed,” Mr Ndayisaba said. AfDB says to make EWSA a selfsufficient utility, it needs to be put on a path towards becoming a credible entity capable of corporate borrowing from commercial sources and possibly issuing of bonds to be sold to domestic investors. The bank is recommending a management audit of the institution to review the present structure and improve creditworthiness. The Government has set a nation- al target to increase the country’s electricity access to 70 per cent by 2017. It plans to increase installed ca- pacity to 1,160MW by 2017 according to estimates by AfDB. This requires a total investment of approximately $4.2 billion from 2013-2017 with an annual investment of $845 million.
January 20th 2014
February 3rd 2014