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Djibouti, March 2018 @ Druid007

Did Djibouti Just Jeopardize Investment for All of Africa?

After the seizure of a port facility by the Djibouti government, questions arise about the safety of investing in Africa. 

Following a legally dubious seizure of the Doraleh Container Terminal and the abrupt termination of DP World’s contract by the Djibouti authorities at the end of February, the company’s chairman, Sultan Ahmed bin Sulayem, had harsh words for both Djibouti and other governments on the African continent. Speaking at a news conference in Dubai, Sulayem stressed that “Africa needs infrastructure investments and if countries can change their law, [to take assets then this] is going to basically make it more difficult to attract investment.”

The seizure is the latest chapter in a six-year tussle between the government of Djibouti and DP World, a Dubai-based trade-logistics company, over a concession agreement that saw the latter design, build and operate the container terminal at the Port of Doraleh, in which DP World holds a 33% stake. Djibouti had alleged that the 30-year concession (in effect since 2006) “contains elements in flagrant violation of its sovereignty.” In 2014, it initiated legal proceedings at the London Court of International Arbitration (LCIA) accusing DP World of paying bribes to the head of Djibouti’s port authority, Abdourahman Boreh, when the concession was secured.

Those allegations were categorically rejected by the LCIA last year. The court ruled the concession terms were “fair and reasonable” and cleared Boreh of wrongdoing after the Djiboutian government ran into trouble for misleading judges in London. Coming one year after that decision, DP World claims the seizure is just another step in Djibouti’s campaign to force a renegotiation of the contract. Dubai’s government also accuses Djibouti of arbitrarily flouting a signed agreement.

Competing Interests

But why is Djibouti so insistent on renegotiating the deal? The real reason behind this otherwise complicated legal tussle is the battle for influence over the country’s ports. In fact, the tiny country is a square in a geopolitical chessboard where world powers, particularly the United States and China, are competing for pre-eminence. The Doraleh area houses America’s largest military base in Africa, as well as China’s, which inaugurated its first African base there last August.

After the port seizure, many American officials feared Djibouti’s intentions were to seize the port from DP World only to cede it as a gift to the Chinese. The erstwhile US secretary of state, Rex Tillerson, made Djibouti one of the five stops on the African tour that turned out to be his last. Speaking in Addis Ababa, Ethiopia, just before his dismissal, Tillerson offered this oblique warning: “We are not, in any way, attempting to keep Chinese investment dollars out of Africa. They are badly needed. However, we think it’s important that African countries carefully consider the terms of those investments.”

Tillerson’s point is a valid one. Locals are increasingly worried about their countries’ over-reliance on Chinese money. Beijing’s investments span across almost all sectors, and there seem to be hidden strings attached. Earlier this year, allegations emerged that China had bugged the headquarters of the African Union. That the AU building itself was wholly financed and built by China raised eyebrows, in particular the reports that its systems sent data to Chinese servers for five years.

Large swathes of Chinese investments in the media sector have raised concerns about media neutrality as well. In 2012, China loaned the Nigerian state of Kaduna just over $30 million to fund its shift from analogue to digital broadcasting — a brazen attempt to strengthen the state-mouthpiece model of broadcasting over local independent voices.

While the Chinese investment model is far from exemplary, some Africans focus on the potential positives. Kenyan president Uhuru Kenyatta framed the question by insisting that, for China-Africa relations to get better, “just as Africa opens up to China, China must also open up to Africa.”

Potential Positives

In reality, investment in African countries cannot be a zero-sum game between American, Chinese and other interests. The continent, as both Sulayem and Tillerson rightly pointed out, has serious infrastructural deficits that require large-scale investment. The International Monetary Fund’s 2018 Article IV consultation report indicates Nigeria could grow its GDP by three-fourths of a percent if its large infrastructure gap is narrowed.

This means attracting investment from all sides and looking to creative solutions. Many African countries are taking the lead in capital investments, telecommunications and agriculture. The continent now has substantial investments from other regions such as the Middle East. Presently, non-oil trade between Africa and the Persian Gulf is valued at around $24 billion — representing a 700% growth over the previous decade.

Other analysts believe alternative investment options, such as Islamic finance, could be key to closing sub-Saharan Africa’s infrastructural investment deficit, currently at $100 billion per annum. South Africa, Nigeria, Senegal, Togo and Ivory Coast have all issued sovereign sukuk (Islamic bonds). Kenya is also preparing to hop on board that train, though the Kenyatta government has pushed back its first issuing.

Irrespective of the numerous hurdles, the simple fact for investors to keep in mind is that Africa should not be treated as a charity case. The region has produced at least half of the world’s fastest-growing economies in the last two decades. Africa is estimated to be home to 1.7 billion people by 2030. Taken together, the consumer and business spending of that population will come to $6.7 trillion a year.

In 2016, the World Economic Forum highlighted six reasons to invest in Africa, the core of which is its continuing economic diversification and its capability to lead in sustainable development in the future. With the recent signing of the Continental Free Trade Area agreement — an EU-like pact to unify Africa’s economies — by 44 countries, the continent’s demographic and economic growth will come to power global trade in the decades to come.

The rest of the world should see countries like Nigeria, Ethiopia, South Africa and Kenya as engines of future growth, so long as their governments can provide political stability, good governance and the rule of law. To make sure political capriciousness does not interfere with economic progress, leaders across the continent need to make sure Djibouti’s willingness to undermine other partnerships to please China proves the exception and not the rule.

*[This piece has been updated.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Druid007 / Shutterstock.com