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Esther Kahinga

Sanjoy Sanyal

For local manufacturing to create jobs in Africa, governments need to look beyond standard incentives

In March 2020, the onset of the Covid-19 pandemic in Africa brought with it a difficult time for businesses and consumers relying on imported goods. The lockdowns intensified the need for local production of certain goods to avoid overreliance on overseas trade, especially for essential items.  Moreover, a survey by GOGLA in June 2021 shows that the prices of solar products are set to increase due to delays in the supply chain. 

Before the pandemic, African governments had started promoting local manufacturing by putting in place incentives to encourage private sector investment into the sector. The key motivation being addressing the unemployment problem especially for a burgeoning youth population. 

A study by the Africa Clean Energy Technical Assistance Facility and World Resources Institute assessed the viability of local manufacturing or assembly of off-grid solar (OGS) products in five countries - Ethiopia, Nigeria, Rwanda, Tanzania, and Zambia. The assessment showed that governments in these countries have put in place fiscal incentives to promote local manufacturing, created special economic zones, and improved the speed of processing business applications. However, the assembly of OGS products is still limited. 

Challenges

The real barriers include lack of quality standards for assembled products, taxes on components needed to assemble the solar products, inconsistent implementation of incentives, and uncertainty in off-take demand. Despite these challenges, apart from Zambia, the other countries have two to five companies involved in either solar or electronic assembly. 

There is a huge and growing opportunity 

The five countries have an unelectrified population of close to 200 million people accounting for about one-third of the entire population without electricity in sub-Saharan Africa. There are additional opportunities in the productive use sector with the need for 2.8 million water pumps in the region by 2030, besides other uses such as cooling, drying, milling, and threshing. 

Boosting local manufacturing 

Some of the actions that could enhance the viability of local manufacturing and/or assembly of OGS products include a) creating market demand for solar products through public procurement, b) results-based financing for locally assembled products, c) establishing quality standards for the small components that go into a solar system, d) simplifying and clarifying import procedures, e) setting-up incentives that do not disadvantage those engaged in local assembly or manufacture. 

Another study recently published in The Economist, adds that creating linkages between foreign and local businesses can help bridge skills and financing gaps. Historically, locally owned firms have struggled to access finance, attract skilled talent and space in special economic zones, unlike foreign firms. 

Build back better strategies 

Countries developing ‘build back better national plans’ could tap into the recommendations of the report. For instance, Nigeria’s Economic Sustainability Plan 2020 includes a solar strategy for electrification of 5 million households that incorporates local assembly and will be implemented in three phases. McKinsey in Nigeria recommends the three phases should be; proof-of-concept where existing assemblers are supported to prove the potential in the sector, a scale-up phase where a set of incentives are provided to unlock the market, and a maturity phase focused on sustaining assembly and expanding to manufacturing. Phases one and two will require tax exemptions to stimulate local demand. Rwanda has also attracted foreign direct investment into a solar product and LED light assembly company thanks to a policy that assures off-take of the products at market prices. 

These examples show that with an enabling policy environment and incentives that address key business challenges, African governments could use local assembly or manufacturing to address the problem of unemployment across the continent. 

 

 

Source:  https://www.powerforall.org/insights/finance/local-manufacturing-create-jobs-africa-governments-need-look-beyond-standard-incentives