Investors are eyeing Africa’s digital infrastructure startups, chasing the creation of an “India stack” across multiple African nations. But what does this mean? And why is the government’s involvement crucial?
Understanding the ‘Stack’
Everyone wants to invest in digital infrastructure startups. Specifically, investors have said they want to invest in the companies building the “India stack” for multiple African countries. You’ve probably heard the term “stack” tossed around. Sometimes it’s about the “identity stack”, other times, it’s a literal payment stack. The dream? Reaching that sweet spot of public infrastructure that India and Brazil have nailed – a game-changer that sparks growth, kickstarts loads of businesses, and lets the startups cash in on an ecosystem tax. But here’s the catch – for it to really take off in Africa like it did in India and Brazil, we’re going to need the government on board.
And when I say “digital infrastructure”, I mean everything that lets us live our digital lives. It’s not just the towers and subsea cables that give us internet access, but also the software that lets us chat with computers and use them to chat with each other. We’re mainly talking about the software here, but don’t forget, there’s a hardware angle to this too.
Why it has to be government-led
Prioritizing access over short-term profits
Only a small portion of the population in many African countries has access to digital services, even with the increase in mobile and internet access. Sure, digital services already exist, but they either don’t function as they should, or they charge too much for access. In this scenario, governments can subsidize various parts of the ecosystem to promote access or other public goals (for example, financial inclusion.)
Take India’s UPI as an example. It’s free for merchants and only introduces charges when they hit a high threshold. Compared to the fees charged by Visa or Mastercard, UPI is much more affordable. To get Pix off the ground, the Brazilian government mandated the country’s largest banks to participate. Someone has to set and enforce the rules. Short-term economic incentives won’t make access a priority; they will (and should) focus on profit. The government’s involvement can offset the costs for private companies providing access – a goal everyone can get behind. Plus, financial inclusion is a fantastic goal that leads to positive economic impacts. We already know that access to digital infrastructure correlates with GDP growth.
If the existing payments infrastructure companies had their way, solutions like UPI or Pix might never have seen the light of day. UPI in India, for example, has been a financial burden for the country’s financial institutions, to the point where the government has considered reimbursing them for lost payments revenue. Access has remained an issue in many countries that have had card-based systems for a long time, even as those systems continued to be profitable for their owners and expensive for the users. Governments, however, can put off short-term economic interests and prioritize citizens. Who else but the government can place public interests first and shift things in favor of the customers who need it most?
Government as a provider of non-rival services
There are certain things that governments are uniquely positioned – or at least most trusted – to do. Consider identity. The government collects and maintains information used to identify people and gather other necessary information for law enforcement. Only the government needs to have this level of detail to carry out other state functions like taxation and the distribution of public benefits. How can the government tax us if they don’t know anything about us? This task would be challenging for the private sector to handle alone – consumers would understandably balk at the private ownership of public data. A publicly available identity layer can improve government performance, reduce fraud, and stimulate a new ecosystem. Currently, half of the people in Sub-Saharan Africa don’t have proof of legal identity. Having a legal identity is the first step to paying taxes or receiving government benefits. On the positive side, it seems Africans trust their government and public institutions more than other regions of the world.
Solving the Government’s problems today
Government needs these digital infrastructure solutions more than yet another lending startup or digital neobank. The government needs to have information, identity, and a cost-effective means to perform state functions, like taxation and distribution of public benefits. In other words, the government is the main customer for these use cases. TraderMoni in Nigeria, for example, emerged from a need to identify and disburse low-cost loans to Nigerian businesses. In doing so, they’ve created a reliable registry of SMEs in a country with more people than California, Texas, New York, and Florida combined. This, in turn, makes it easier to provide targeted government grants to those who need them most. This was the driving force behind the creation of India’s Aadhar – to improve benefit distribution to qualified recipients.
Slow down, so the government should build everything?
No. But governments should actively create, manage, and oversee these solutions. Actually, the gold standard in public digital infrastructure, India’s layer, was constructed with significant input from the private sector.
Yeah, there are risks. We’re talking about data privacy, the risk of supporting or entrenching a totalitarian government, or simply facing public sector incompetence. To make things even more complicated, many African countries aren’t exactly strong states. How can they enforce or apply the necessary safeguards for something like this to work? Africa does have some promising initiatives, but very few are on a scale that can bring about significant change.
But what about the costs?
Even though it’s big, public digital infrastructure can be mega profitable. Plus, it’s not nearly as expensive as physical infrastructure. Solutions like Pix or Aadhar probably generate way more in value than they cost to create. Brazil’s Pix costs 5-10 times less than card payments, and given its scale, they must more than make up for it in volume. (One estimate says Pix cost about $10M to build.)
The somewhat awkward(?) conclusion here is that the change we need – be it social, economic, or political – starts with getting involved with the government. Private companies can only do so much, but government direction is necessary to truly transform the lives of the millions of Africans who come online each year. When electricity was first discovered, people didn’t know what to do with it besides using it for lighting. But it’s a different game in Africa – we know what works and why. It’s time for the government to lead.