Djibouti has recently inked an agreement with China to streamline the East African country’s Customs systems, in a bid to consolidate its position as a logistics and trade centre for the region.

The agreement comes as Djibouti channels some $14bn worth of investment – including over $1bn worth of concessional financing from Chinese banks ­– for a spate of major infrastructure projects, ranging from free trade zones to a new railway and port facilities.

The new Silk Road

In January China signed an agreement with Djibouti to create a “Djibouti Silk Road Station”, which will expand the country’s trade and logistics capabilities and turn the Port of Djibouti into a key entry point for Africa.

According to the Djibouti Silk Road Station Construction Cooperation Framework Agreement, the two countries will create a unified Customs system to improve efficiency and reduce trade costs, establish a transit trade centre to manage export processing and distribution and set up a currency clearing system to promote China-Africa trade. The agreement also calls for a joint venture company to be set up to operate the facility.

The joint initiative will help Djibouti to further increase its share of regional trade – currently, the country handles roughly 95% of neighbouring Ethiopia’s inbound trade, for example, a market of some 95m people – with Aboubaker Omar Hadi, chairman of the Djibouti Ports and Free Zone Authority (DPFZA), having told OBG late last year that the country aims to become a gateway not only to Ethiopia but to South Sudan, Somalia and the Great Lakes region.

The Djibouti Silk Road Station is part of China’s One Belt, One Road (OBOR) initiative launched in 2013 which aims to create a new Silk Road, by developing trade routes and links that connect China to over 60 countries in Asia, the Middle East, Europe, South-east Asia and Africa. China will inject at least $62bn into the initiative, expected to link a total market of 5.1bn.

Last March the DPFZA also announced an agreement with China Merchants Holdings – China’s largest public port operator – to develop a $7bn free trade zone (FTZ). The 3500-ha FTZ is set to be the largest in Africa and will target diverse industries such as ICT, electronics, light industry and construction, along with hosting a transit site for import-export companies. The new FTZ will absorb Djibouti’s current 17-ha free trade area.

Strengthening transport

Chinese investment in Djibouti is also being directed toward several large-scale transport projects, particularly in the rail and aviation sectors, which are necessary to further develop Djibouti’s growing trade and commerce capabilities.

The China Railway Group and China Civil Engineering Construction Corporation (CCECC) are leading the construction of a $4bn rail line linking the country’s ports to land-locked Ethiopia.

The 750-km rail link, which is nearing completion, is set to significantly cut travel time to Addis Ababa and boost imports from and exports to Ethiopia. Currently, goods transported from the Port of Djibouti to Ethiopia arrive by road, in some cases taking as long as two days to cross the border and leading to significant congestion. The new railway should bring that to less than 10 hours, according to government estimates.

In late November, the first temporary transport via the new rail project – 1125 tonnes of wheat – arrived in Merebe Mermersa, 112 km from Addis Ababa, to support drought-affected populations in Ethiopia.

In addition to rail, Chinese companies are developing port facilities in Djibouti, such as the expansion of the Doraleh Multipurpose Port (MPP), which is estimated to cost $590m and be operational by 2017. The DPFZA is also working on inaugurating five more port facilities, including several with dedicated facilities for specialty cargo, such as livestock and minerals, over the next five years.

Boosting Djibouti’s air transport sector has also been a priority for the two countries. Two new airports, financed by the CCECC, are being built for a combined investment of $599m.

The larger of the two facilities – slated for completion in 2018 – will be located 25 km south of Djibouti City and will handle 1.5m passengers and 100,000 tonnes of cargo. The second facility, located in the north, will have a capacity of 767,000 passengers per year.

Diverse investments

Djibouti’s strategic location – with easy access to several of Africa’s fastest-growing frontier markets and proximity to Middle Eastern ports – has been one of the primary factors underpinning China’s interest in the country’s transport infrastructure. However, Djibouti’s positioning, particularly in relation to piracy hotspots in the Indian Ocean, has also attracted the interest of China’s military.

China recently confirmed construction of a military facility intended to provide better logistics and safeguard Chinese peacekeepers in the region. According to press reports, China will pay $100m per year in rent for the base, set to abut the MPP extension.

The facility will be China’s first overseas naval base, close to US Camp Lemonnier. Like the US, China has signed a 10-year contract with a renewal option for an additional 10 years, Mahmoud Ali Youssouf, foreign minister, told international media.