Covid-19 could prove a defining moment for Africa’s commodity value chains, dramatically speeding up the process of digital adoption and making tradetech part of everyday business across the continent, writes Tedd George, founder and chief narrative officer at Kleos Advisory.
The Covid-19 pandemic has put the spotlight on trade technology like never before. As nations face strict lockdown measures and value chains shudder to a halt, digital has become the key – and often only – means of transacting business. In Africa, there has been a keen focus on the continent’s value chain and on the goods and commodities that flow through it. The crisis has presented the opportunity for tech-enabled innovations that offer real value to prove their worth, and many are speeding up digital adoption, from the farmers and traders at the start of the supply chain to the manufacturers, distributors and financiers at the end.
Given the devastating impact the pandemic has had on human life and business, it may have been overlooked how well tech solutions have functioned in Africa throughout the crisis. Although the shift to digital has been painful for those used to doing business face-to-face (and with poor internet connections), most professionals in the commodity business are accustomed to working from hotel lobbies or airport lounges; for them Zoom calls and Google Docs are ‘business as usual’. It is true that the personal impact on staff has been huge and new business development restricted, but the ability of the continent’s trade and commodity finance community to keep business going – and close deals – has not been affected thanks to the digital platforms they use.
Numerous digital systems for authenticating and exchanging documentation – the very basis of trade finance – are functioning exactly as they should. And as digital becomes the only way of transacting in lockdown, it is dragging in the laggards. For example, many credit officers and lawyers who until last year accepted only paper signatures have been forced to adopt electronic signatures. To their surprise they are discovering that digital authentication is faster and less susceptible to fraud. Once the crisis has abated, few are likely to call for a return to paper. The real barrier to digital adoption is perhaps not technical but mental. Covid-19 is forcing a mindset change on an entire generation of professionals who were trained to trust paper – and there is no turning back.
Digital payment systems are also proving their worth in Africa’s trade value chain. One example is the Tanzania Customs Integrated System (Tancis), a paperless system for managing the payment of custom duties. It also serves to help eliminate fraud, for example when an importer claims that goods will be exported to a neighbouring country – thus avoiding paying duty at the port – but later sells them in-country. Under Tancis, all goods arriving at port in Tanzania are registered on the system and the duty paid into an escrow account. If after 30 days the goods have not crossed a border, the money is paid to the Tanzanian authorities. If the goods do cross a border, there is no exchange of documents but a simple swipe of the barcode on the goods as they pass from Tanzania into the importing country, at which point that country receives the duties from the escrow account. This system has dramatically reduced the opportunities for fraud at the country’s ports and borders and has created an incentive for Tanzania’s neighbours to more effectively monitor goods entering their countries so that they can claim the duty.
Despite these pockets of success, most documentation in Africa’s trade value chain is still on paper. Bills of lading, warehouse receipts and invoices are nearly all issued on paper, even though digital alternatives have been available for years (such as Bolero’s and essDocs’ systems for electronic bills of lading). The reliance on paper not only causes blockages in the value chain – with goods stuck in the hold of a ship or rotting on the quayside because the documentation to release them is missing or incorrect – but also creates huge opportunities for fraud. The history of commodity finance is littered with examples of multiple banks extending finance against the same bill of lading or warehouse receipt.
Next gen tech is changing the game
The solution to this problem comes from the next generation of tech – blockchain, artificial intelligence (AI) and machine learning, and the internet of things (IoT). When combined, these technologies can deliver extraordinary transparency and insight into the value chain, greatly enhancing the monitoring of risk and fraud.
Blockchain has been the most hyped of this new tech, with numerous projects underway for low-cost peer-to-peer and cross-border payments, and for trading digital assets. In the world of trade, the most advanced application of blockchain technology is in traceability and provenance. Blockchain technology can be used to ensure goods are both sustainable and authentic, giving those involved in the value chain a level of oversight unthinkable even five years ago.
Blockchain-based solutions such as Everledger and Dorae are tracing conflict minerals – diamonds, cobalt and coltan – through Africa’s value chain to the end manufacturer or retailer, helping them meet increasingly stringent compliance standards and consumer expectations in their home markets.
During the pandemic several blockchain-based projects, such as Kenya-based Uthabiti, have also been rolled out to trace the origin of medical supplies in order to ensure their authenticity.
Blockchain is an even more powerful tool when combined with machine learning. Machine learning is data agnostic and can crunch enormous amounts of data, which could be anything from cocoa flows to containers going through a port, or deliveries by truck to a warehouse, and extracting insights from it. As the process ‘learns’ it builds bespoke models of behaviour for all the participants and flows in a particular value chain. An example of how this is being applied is the weeding out of ‘false positives’ that typically make up 90-99% of AML alerts, letting money laundering reporting officers focus their efforts on the small number of alerts worthy of their attention.
IoT is linking all the technologies together
The final step in this process is IoT – combining the digital trust of the blockchain, the computing power of machine learning and live data from an array of devices on the ground to give a complete overview of the flow of goods as they move through the value chain. This is a powerful tool for managing risk, giving traders and lenders visibility of their assets as they go through the conversion cycle, as well as clear lines of sight on where the responsibilities and liabilities lie.
So-called smart contracts – agreements written in computer code that are programmed to complete transactions automatically once certain conditions are met – can be combined with blockchain and IoT to track shipments and trigger the release of funds.
An example of how this combination of technology works together in the real world can be found in a project currently being developed for a South African miner. A major constraint for mining companies is insufficient cashflow and this project aims to dramatically reduce the time between the delivery of ore and payment by the offtaker. When a truck laden with ore arrives at the processing plant, it drives onto a scale where it is weighed, photographed and its number plate read by a scanner, all of which is logged in the system. The AI calculates the amount of ore in the truck and the smart contract immediately makes a payment for that amount to the mining company. The amount could be at a fixed price per tonne or it could reflect live prices using an agreed benchmark. Typically mining companies receive payment four to six weeks after delivery; with this system they could be paid before the truck has driven off the weighing scale.
There are, naturally, checks and balances in the system to ensure that trucks are not simply filled with rubble. But should a fraud be detected, information about the truck, its driver and those responsible for its loading can instantly be called up and cross-referenced with other deliveries to detect patterns of fraud. On the blockchain, there is nowhere to hide.
Of course, most of Africa’s commodity value chains are a long way from reaching the levels of efficiency and visibility of this bleeding-edge project. But the technologies it brings together are becoming widespread in Africa. Mobile phones are all that’s needed to collect and transmit data to the cloud and mobile adoption is growing exponentially.
According to the GSMA, Africa will this year pass the statistical tipping point when over half of the population will have a smartphone and access to 3G. Moreover, tracking sensors are becoming increasingly affordable. Shippers have used radio-frequency identification (RFID) tags to track containers and goods for years, and there are numerous devices that can provide live updates on the ground – from cheap webcams installed in warehouses and ports, to drones monitoring crops and livestock, and remote sensors in the fields transmitting data on soil moisture and nutrient levels.
The pressure to digitalise processes as a result of Covid-19 will accelerate the integration of these devices into IoT, connecting more of the hidden parts of Africa’s commodity value chain to the cloud. This will, in turn, open the door to wider application of machine learning, which will have a wealth of new data to draw on. This will also force a shift in the part of the value chain most resistant to change – the farmers and traders at the start. They have an abundance of knowledge on Africa’s commodity markets and value chains, but it is currently inaccessible to their partners and financiers. As more of them turn to transacting on smartphones and other digital devices, the digital world will extend to the very source of the commodity value chain. This will enable the traceability of products from the original farmer through the traders and processors to the final offtaker.
Covid-19 is waking up African regulators to the potential for digital innovations – notably regtech – to transform efforts to root out fraud and remove barriers to financial inclusion. It is also forcing regulators to reconsider new technologies they had previously resisted, such as blockchain, which has struggled to escape its association with bitcoin.
In recent years innovation has been led by Africa’s fintech pioneers – South Africa and Kenya – and by rising tech hubs in Nigeria, Ghana, Egypt and Rwanda. Last year Kenya became one of the first African countries to set up a regulatory sandbox. Its members include Pezesha Africa, a crowd-lending platform that helps investors lend to SMEs, and Innova, a cloud-based data analytics platform for investors, fund manager and banks. It is hoped that as the pandemic continues and digital adoption accelerates, more nations will follow suit. This is essential for nurturing closer dialogue between regulators and innovators, educating both parties on how the other thinks and works, and removing the regulatory barriers that block innovations from making it to market and being scaled across the continent.