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Section 3: Infrastructure in Djibouti

Fitch Solutions Logistics Risk Index

  • Djibouti is placed in ninth position out of 11 East Africa states and in 175th position out of 201 states globally in Fitch Solutions’ Logistics Risk Index.
  • Overall, Djibouti’s Logistics Risk Index score underperforms against the East Africa average, notably for the components of ‘trade procedures and governance’ and ‘utilities network’. However, Djibouti’s ‘transport network’ score is significantly higher than the regional average.
Chart: Logistics Risk, 2019
Chart: Logistics Risk, 2019

Logistics Risk Index: Methodology and Components

  • 100 = Lowest risk; 0 = Highest risk
  • The Logistics Risk component is calculated using the average of the Transport Network, Trade Procedures and Governance and Utilities Network scores.
  • Transport Network: this indicator assesses the extent and quality of road, rail, air and waterway transport networks within a country, which indicate capacity and ability to transport raw materials and finished goods around a country.
  • Trade Procedures and Governance: this indicator assesses the time and cost required to import and export goods by container. In addition, a country's air freight volumes and connectivity to shipping networks is used to gauge its potential as a shipping or freight hub. An ideal market would have strong freight connections and low levels of trade bureaucracy.
  • Utilities Network: this indicator assesses the quality and availability of electricity and fuel, and their costs, and considers the availability of water, industrial usage, and evaluates the quality and extent of the telecommunications networks and internet penetration. A well-developed utilities sector enables the smooth running of supply chains.

Electricity Supply & Costs

Djibouti has an extremely small capacity base from which to generate electricity, based primarily on diesel power facilities. As such, the country remains vulnerable to global oil price shocks given it is highly reliant on fuel imports for electricity, as well as for vehicles and fuel to households for cooking.

Historically, there has been limited investment channelled into building additional domestic power capacity in Djibouti, and the country has instead increasingly relied on imported electricity from Ethiopia, primarily sourced from hydropower projects. Supply is volatile in line with rainfall fluctuations, leaving Djibouti heavily exposed to power shortages. The country’s reliance on expensive diesel and electricity imports from Ethiopia contributes to Djibouti’s noticeably high electricity costs in East Africa, eight times higher than Ethiopia’s and three times as high as in Tanzania. Furthermore, despite the country’s small population size, large swathes of the population, particularly rural communities, do not have access to electricity; electrification rates hovered around 42% as of 2017. As such, businesses operating in Djibouti are faced with high cost and volatile electricity supply from the grid system or inflated costs due to the need to obtain and run on private generators to avoid power interruptions.

The electricity situation is likely to improve in Djibouti over the coming years, particularly in terms of supply. Firstly, electricity imports from Ethiopia will increase in line with the commissioning of large-scale hydropower projects in the country, particularly the Grand Ethiopian Renaissance Dam (GERD). Secondly, Djibouti is looking to expand its renewable energy sector to meet 100% of domestic demand from renewable sources by 2020, by exploiting its solar, wind and geothermal resources. Utilising indigenous energy resources and building more capacity is likely to have a positive impact on energy security and costs.

Chart: Electricity Cost and Electrification Rate
Chart: Electricity Cost and Electrification Rate

Transport Network

Djibouti has a well-developed and relatively efficient transport network, in part due to the government’s infrastructure investment programme, which has formed the backbone of the country’s development plan and has spearheaded rapid economic growth. Between 2015 and 2025, projects to the value of almost US$20 billion will be constructed. The successful commissioning of the large project pipeline will raise Djibouti’s logistics profile and facilitate its emergence as a key transport hub and gateway to East Africa.

The government has sponsored projects across the road, rail, port and airport sectors as the country aims to develop its transport and logistics capabilities. For example, in 2017, the country opened three ports within the space of two months. The Doraleh Multipurpose Port was completed in May 2017 and has the capacity to handle 8 million tonnes of both bulk and container freight. The US$64 million Ghoubet port has been developed to facilitate the export of salt. The port has an operational capacity of 5 million tonnes per year. The Mekele-Tadjoura Port railway, in the northern part of the country, is still in the planning phase. The railway will facilitate the export of potash from Ethiopia through the new Tadjoura port. The US$90 million Tadjoura port has an annual capacity of 4 million tonnes.

China has played a particularly active role in investing in the country’s transport network in line with China’s Belt & Road Initiative (BRI). China Merchants Group owns the Doraleh Multipurpose Port, which was completed in May 2017. In 2018, China also opened the Djibouti International Free Trade Zone, Africa’s largest free trade zone, which is owned in part by Dalian Ports Group, IZP and China Merchants Group. In 2017, China’s POLY-GCL Petroleum Group announced plans to develop a US$4 billion liquefaction plant to process natural gas from Ethiopia. The project will include a pipeline and export terminal.

Supply Chain Logistics

Sustained infrastructure development will help Djibouti emerge as a major logistics hub for East Africa, particularly serving landlocked Ethiopia but also Sudan, South Sudan, Eritrea and Somalia over the longer term. Already, approximately 70% of Djibouti’s trade is related to transhipment for Ethiopia.

Djibouti’s import procedures are extremely competitive when compared to its regional neighbours, particularly in terms of the time it takes to carry out imports, which stands at an average of 128 hours, the lowest in the region. That said, exports still require extended amounts of time to carry out, raising costs and delays for outbound freight.

Chart: Time to Export and Import, 2017
Chart: Time to Export and Import, 2017

Tariffs & Trade Regulations

To encourage investment in both the general economy and the free trade zones, Djibouti offers various tax incentives under the Investment Code and Free Zone Code (see section 4). Furthermore, the investment codes guarantee businesses can freely import goods, equipment, products, or material necessary for their investments with no ‘forced localisation’ and can freely choose customers and suppliers, and set prices.

 

Manufacturing in East Africa: Djibouti

Section 1: Industrial Manufacturing Focus
Section 2: Labour & Land Resources
Section 3: Infrastructure
Section 4: Regulations & Tax Incentives
Appendix: Relevant Government Bodies
        
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Content provided by Picture: Fitch Solutions – BMI Research
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