COVID-19 Africa Watch talks to Gagan Gupta, co-founder of Arise IIP, Arise IS and Arise P&L, about COVID-19’s impacts on trade trends in Africa and the infrastructure priorities for accelerating the economic recovery.
Below are some of the main takeaways from COVID-19 Africa Watch’s conversation with Gagan Gupta – co-founder of Arise – a pan-African ecosystem developer that designs, creates, finances, and builds interconnected infrastructure and provides logistics solutions.
- COVID-19 has accelerated five trade trends that affect African economies. First, the African countries are attempting to diversify their supply chain away from Asia. Second, as a response to the massive need for carbon reduction globally, industries are being relocated, bringing the supply chains closer to where the raw material is. Third, the polarization of international trade between Western trade blocs and Asian trade blocs is presenting the opportunity for Africa to position itself as an alternative. Fourth, there is the opportunity for Africa to shift from a global commodity supplier to a global manufacturing powerhouse, supplying to other customer blocs. Finally, the African Continental Free Trade Agreement (AfCFTA) is likely to boost intra-regional cooperation and trade with other blocs.
- To ensure that intra-African trade growth materializes at scale and in a timely manner, there needs to be the logistics infrastructure to move goods within the Africa as well as a need for additional capital and financial infrastructure.
- The ingredients for Africa’s industrial success include the availability of cost-competitive hard infrastructure such as water, roads, and electricity, but also require “soft infrastructure in place,” including conducive government frameworks and the right financing structures.
The interview was conducted by Davis Laporte, an IFC-Milken Institute Capital Market Scholar and Chief Investment Officer at the Seychelles Pension Fund. A transcript is available below.
Hello, my name is Davis Laporte. I am the Chief Investment Officer at the Seychelles Pension Fund, and I’m also an alumnus of the IFC Milken Institute capital markets program. Today. I am delighted to welcome Mr. Gagan Gupta, who is the founder of Arise, a conglomerate of three companies, which exclusively focuses on developing and operating industrial parks, infrastructures, and port facilities across Africa. I have to mention that Mr. Gupta openly supports building an African industry, especially one that focuses on local and sustainable transformation.
Mr. Gupta, it is a pleasure to have you in this conversation and welcome again.
So as a first question, about just a year ago, African countries recorded their very first COVID-19 case. In many instances, the private sector played a key role in supporting governments to curb the impact of the coronavirus. So, can you briefly share with us your own experience with Arise in West Africa?
Sure. Thanks for having me with you, Davis. At Arise, we operate across West Africa, so from Gabon, Togo, Côte d’Ivoire, Mauritania and other countries around. So, when the COVID breakout happened, we observed three things. First, African governments were quick to put in place restrictions in terms of travel that really ensured that the onset was slower. But at the same time, I think a lot of governments were struggling to get access to personal protective equipment (PPE) early on. So I think there were big hiccups in the beginning. At Arise, we played a role in the countries that we operate in, we donated significant amounts of PPEs, significant amounts of masks, and other aspects to ensure that these countries are well staffed.
That was on the COVID side, but importantly, I think most of these countries during this period continued their economic journey. So while we saw the massive lockdowns across the globe, these countries also had some form of lockdown, but their economic journey continued. And I think that was a little bit different compared to other parts of the world. We saw that during peak of COVID, for example, in Togo in July, we were actually negotiating with the government of Togo and we signed the development of an industrial park. So that really showed that some of these governments were more agile and able to continue to operate during COVID as well.
Okay. So do you think the COVID-19 pandemic has provided an opportunity to genuinely reconsider the ways countries choose to develop?
I think COVID 19 has really accelerated a few trends. At Arise, we believe in three key trends. One is that employment in Africa is a big, big challenge. So the amount of jobs that Africa needs to create is massive when you see the demographics, and the real unemployment rate is over 35%. So that one challenge is always there.
The second challenge is purely African exporters’ resources. So Africa for long has been exporting resources – I don’t need to mention, but you know, Africa produces 55% of global cashew nuts, but in terms of value chain, they retain less than 15%. In cocoa, they produce 70% of global cocoa, but they retain 6-7% of the value chain. And we can repeat this over manganese, rubber, cotton, or other commodities. Which takes us back to looking clearly at unemployment. When you look at countries exporting raw materials, for me, you are basically exporting jobs. So I think that trend was anyways there.
I think the third trend was really the focus on climate. But what COVID did was it really reinforced these trends in a very significant manner.
So I think post-COVID, or during COVID, five things emerged very clearly. I think all the countries realized, and especially in their trading blocs, that they need to diversify away from global supply chains tied to Asia. I think everybody was so dependent on global supply chains to Asia, and COVID changed that. And a good example was what happened with masks. You know, at the peak in April last year, China was producing 110 million masks a day that represented 80 to 90% of global capacity. Or look at what is now happening on the freight rates. You know, the freight rates from China to Europe have now quadrupled to $9,000, whereas that used to be $2,000. So I think that clearly is one trend that is accelerating, which is really countries wanting to diversify their supply chain away from Asia.
I think the second trend that is happening is really the massive need for carbon reduction globally, and which will happen by relocating industries, by reshaping internal logistics and leveraging Africa’s carbon endowment. I think as more and more global focus comes on sustainable development, the supply chains will now come closer to where the raw material is. For example, rather taking raw cashew from Africa to Asia and then bringing it to Europe or the US, it might be better to process it here in Africa, and people will start doing that. And that’s a second trend that is really emerging now.
I think the third trend that is clearly intensified is the polarization of international trade between Western trade blocs and Asian trade blocs, especially China. Africa can position itself as an alternative in this. And a good example is the textile industry. The US and UK are now both are looking to ban imports of cotton products from the Chinese province of Xinjiang, where we have this whole Uighur situation. China produces 20-25% of global cotton products, and 84% of that production comes from that single province. And I’m sure you’ve seen the latest German law saying that brands can be held responsible if their entire supply chain is not clean. So clearly there is a massive opportunity emerging out there for Africa.
I think fourthly, there’s also big opportunity for Africa if it can shift from a global commodity supplier to a global manufacturing powerhouse, and supply to other customer blocs. And that really comes from three things. One, I think is manpower. We know that globally, the demographics are winding down in rest of the world, and China is no different. If you look at the global workforce that was available between 2010 to 2020, it was over 112 million. Whereas in Africa, between 2020 and 2030, there’ll be 159 million people. And if you compare that now with China, China had only 6 million people between 2010 and 2020. And in 2020 to 2030, there will be negative 37 million. So that is massive opportunity for Africa even in terms of manpower alone.
And I think lastly, the way the African Continental Free Trade Agreement (AfCFTA) is coming in will foster intra-regional cooperation as well, and will foster trade with other blocs. I think if you look at all these five trends and coupled with the three trends that I mentioned earlier are already happening, I think COVID has accelerated a possibility for Africa to take flight. It’s very significant.
With the acceleration of the African Continental Free Trade Agreement, do you foresee any opportunities that could transform the way we approach industrialization?
Davis, I think it’s definitely going to be a journey. I don’t think the AfCFTA will be changing anything immediately. It’s a journey and we need to be patient. However, what is important for any of such trade agreement to be successful? First, Africa needs to start producing. I mean, today, are you going to trade raw cocoa between Ivory Coast and South Africa? Are you going to trade raw manganese or iron ore between these countries? No. So I think the first step the countries need to take is, okay, let’s start producing, let’s start transforming. And then the effort comes in, and really the AfCFTA comes in to smooth that out. So I think first part that needs sorting out is really ensuring that the countries are producing.
The second part that needs sorting out is the logistics. I think we all know that if you want to ship something from a port in Gabon to a port in Lome, it might be more costly to do that than shipping it to Europe. But as I said earlier, AfCFTA will definitely accelerate that journey. And we’ll start seeing the fruits of that in the next three to four years.
What types of infrastructure do you believe are essential to ensure that the ambition for us to grow intra-African trade materializes at scale and also in a timely manner?
If you look purely from an infrastructure perspective, I think you need three types of infrastructure.
First, you need to have the right infrastructure to industrialize, what you need for industrialization to be successful. That’s one part. I think, secondly, you need logistics infrastructure – how do you move goods within the Africa? And third, clearly you need financial infrastructure. How do you enable this trade? How do you enable this transformation thanks to capital? That’s completely missing, but it’s crucial in this whole chain. So I think three things, really: first is industrial infrastructure; second, clearly logistics, and thirdly capital and financial infrastructure.
Okay. So then what do you think are the ingredients of Africa’s industrial success?
At Arise we develop industrial zones. We have developed one in Gabon and we are now developing in Togo and Benin and in Côte d’Ivoire. So one thing that we realized is that there are five key elements for industrialization to be successful. First is hard infrastructure. Hard infrastructure is ensuring you have water, roads, electricity, etc. And some of it has to be clearly very cost-competitive. That’s the first part.
I think the second part is really ensuring that the government framework is right, so that when the investor wants to invest, he does not have to go to 23 different administrations of government to get an approval. He should be able to treated in one single place in a very specified timeframe. So clearly the second infrastructure is soft infrastructure, which enables government approvals.
The third infrastructure that you require is ensuring how the industries setting up are able to access their raw materials. So a lot of times you want to set up, but there’s no availability of raw materials. How do you ensure that is there? And this brings up an important point, that countries need to focus on what raw material they have and what value chain they can address, rather than each country trying to say that they want to put up a car plant. So saying, okay, I produce cotton and what can I do in the cotton industry? What can I do in that value chain? So that’s the third part.
I think the fourth part that is very important to industrialization is really human capital development. How do you ensure that you’re training people to handle this industry? Are you establishing the right training centers? Are you having the right schemes so that people are able to practically learn and come there?
And lastly, a very important piece is how do you provide the right financing structure to help this industrialization process?
I think these five key things will make it successful – and finally, all this has to be done sustainably. How do we ensure that we don’t repeat the mistakes that other countries have made while industrializing? Avoiding what happened, for instance, in the garment industry in Bangladesh? I mean, we have seen all seen the accidents that happened there. How do we ensure that when we build an Africa, we don’t repeat it? How do we ensure that industrialization is climate-friendly and carbon-positive, which has not happened in other parts of the world, and which would allow Africa to differentiate itself?
So Mr. Gupta, the world is going through very tumultuous times. And I think the big question will be how investors can mobilize finance at a time when government revenues are falling and debt pressures are increasing?
You’re very right Davis, I think this is a good time for the private sector to play an important role – because as you rightly pointed out, government revenues are going to decrease and African governments especially do not have the printing machine that some of the developed economy governments have in terms of just printing money. And that’s where the private sector comes into play. The private sector can develop this infrastructure in an economically viable way, and there are enough development finance institutions in the market that will help support this journey – the likes of the Africa Finance Corporation and the African Export-Import Bank. We have seen that these institutions are willing to support, so if you have the right project, if you have the right ingredients, then getting the financing is not an issue.
So Mr. Gupta, we’ve come to the end of this conversation. The Milken Institute and I thank you for these wonderful insights. Please keep up the great work! Goodbye and stay safe.