Free Trade Zones and Cargo Capacity at Ports
Free Trade Zones and Cargo Capacity at Ports
Business Model Description
Build businesses operations to increase industrial, transshipment and seaborne cargo capacity around four industrial clusters of focus at Djibouti's ports: logistics (transportation, warehousing and similar), business industry (goods transactions and merchandise display), business support (financial services, accommodation and office spaces) and processing manufacturing (packaging and light processing).
Expected Impact
Increase regional manufacturing output, improve intra-regional trade and enhance value chain development.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Djibouti: Djibouti (City)
- Djibouti: Arta
- Djibouti: Tadjourah
Sector Classification
Services
Development need
Djibouti's economy is dominated by the services sector generating 70% of growth (5). Transport services, especially port activities, are the main growth source and employ most of the workforce (1). As services are becoming more tradable, expanding and diversifying international service exports provide significant opportunities for developing least developed countries (2).
Policy priority
The authorities are continuing the country's development with the goal of setting up a regional hub for trade, logistical and financial services (3). One such attempt is the inauguration of the Djibouti International Free Trade Zone (DIFTZ) in 2018, which is set to be the largest free trade zone in Africa once complete (9).
Gender inequalities and marginalization issues
Consumer services are key to promoting inclusive growth. They provide jobs for the poor, form the backbone of the economy, and offer key opportunities for growth through trade in Djibouti (6).
Investment opportunities introduction
Strong export growth especially in transport and logistics services is expected to improve the current account balance to 2.6% of GDP by 2024. An output growth of 7-8% is expected given the country's strategic location and potential to serve the East African region, especially with logistics and transport-related services (4).
Key bottlenecks introduction
Value added by the services sector, which usually generates 70% of Djibouti's growth, increased only 2% in 2020 compared with 8.2% in 2019 due to the COVID-19 pandemic (5). The absence of efficient services, such as telecom, internet, finance, accounting, legal services and transportation and logistics, hinders overall economic growth and business operations (2).
Consumer Services
Development need
Djibouti's economy is heavily dependent on imports due to the underdeveloped industrial and agricultural sectors, and a large number of companies operate in import and trade activities (8). Future development of the country requires its transformation into a hub for trade, logistics and related services (3).
Policy priority
Djibouti seeks to position itself at the heart of the African trade. The Djibouti International Free Trade Zone (DIFTZ) is set to be the largest free trade zone in Africa once complete (9). Among the priorities of the National Strategy for Social Protection is the promotion of sustainable growth and diversifying the economy through key sectors, including trade (10).
Gender inequalities and marginalization issues
Fewer opportunities for women to participate in trade-related jobs and high levels of unemployment can have a serious impact on the economy, leading to lower consumption, higher poverty and declining well-being of women and their families (7).
Investment opportunities introduction
The Horn of Africa Initiative has launched the Multi-Donor Trust Fund (MDTF) with a capital of Euro 30 million, which includes support for More Trade, More Growth, More Jobs focusing on trade and economic integration covering trade facilitation, regional value chains, and improvements in the investment climate (11).
Key bottlenecks introduction
Prevalence of illicit and informal trade especially in the borderland regions, cross-country clan and ethnic affiliations hindering activity, inadequate public and private investment to support trade are challenges within the consumer services subsector (12).
Professional and Commercial Services
Pipeline Opportunity
Free Trade Zones and Cargo Capacity at Ports
Build businesses operations to increase industrial, transshipment and seaborne cargo capacity around four industrial clusters of focus at Djibouti's ports: logistics (transportation, warehousing and similar), business industry (goods transactions and merchandise display), business support (financial services, accommodation and office spaces) and processing manufacturing (packaging and light processing).
Business Case
Market Size and Environment
> USD 1 billion
The new Djibouti International Free Trade Zone (DIFTZ) Project is expected to draw USD 3.5 billion investment in more than 10 years. The pilot zone for the project, which foresees creation of employment opportunities for 340,000 people and provision of services in an area of 4820 ha, is operational (11).
Indicative Return
10% - 15%
Cost-benefit analysis using an enclave model showed that free trade zones (in China, Indonesia, Malaysia, South Korea and Sri Lanka) had economic internal rates of returns of 10.7-28% with a strong correlation between the growth of export processing zones and the Multi Fibre Arrangements (MFA) where the phasing out of the MFA and guaranteed market access result in lower rates of return (15).
Investment Timeframe
Long Term (10+ years)
The Djibouti International Free Trade Zone (DIFTZ) is expected to take more than 10 years to become fully operational (11). Port investments usually require 30-36 years' concessions and economic zone developments are made according to long-term leases (14).
Ticket Size
> USD 10 million
Market Risks & Scale Obstacles
Capital - CapEx Intensive
Business - Supply Chain Constraints
Impact Case
Sustainable Development Need
Intra-regional trade is key to sustain economic growth, foreign direct investment (FDI) inflows and food security in the Horn of Africa and Djibouti. The Horn of Africa Initiative member states received net FDI inflows of USD 5.3 billion in 2019, a figure which has deteriorated since 2016 (30).
Annual GDP growth fell from 7.7% to 0.5% in 2020 in Djibouti (17). The country aims to tackle unemployment challenges by projects that concentrate around its maritime assets. The Djibouti International Free Trade Zone (DIFTZ) alone is projected to create 340,000 jobs once complete (10).
Djibouti's manufacturing sector is underdeveloped and has traditionally accounted for less than 5% of value added as percentage of GDP (17).
Gender & Marginalisation
Informal employment rates are high in the Djibouti. Informal employment of females in non-agricultural activity was 64.6% in 2017, which is significantly higher than the figure for males at 45.1% (18).
Female employment in industry has declined since the 1990s, and has fallen from 9.68% in 1991 to 6.8% in 2019 (19).
Expected Development Outcome
Construction of special economic zones in the region facilitates intra-regional trade, attracts foreign investment and develops key regional value chains.
Free trade zone investments facilitates economic growth and job creation by attracting foreign direct investment, local entrepreneurship and government support.
Free trade zones develop export manufacturing and processing capacity in Djibouti's key sectors such as food, automotive parts, textiles and packaging (13).
Gender & Marginalisation
Special economic zones such as free trade zones provide women with the first entry into formal-sector employment opportunity in many developing countries (20).
Women dominate the workforce in export processing zones (EPZ) in most developing countries with share of women in total EPZ workforce exceeding 60% (21).
Primary SDGs addressed
8.5.2 Unemployment rate, by sex, age and persons with disabilities
Unemployment rate in Djibouti is 11.5% (of total labour force) in 2020 and has been above 10% since the 1990s, as per the International Labour Organisation (ILO). National estimates record significantly higher rates of unemployment, the latest being 26% in 2017 (22).
The Government's growth projection in Vision 2035 aims to create 200,000 new jobs between 2013 and 2035 (23).
9.2.1 Manufacturing value added as a proportion of GDP and per capita
The manufacturing industry traditionally accounts for less than 2.5% of GDP and was recorded as 2.7% in 2012 (17, 23).
The manufacturing industry target is to increase the sector's share in GDP from 2.7% in 2012 to 5.8% by 2022, and to 7% by 2035 (23).
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Corporates
Indirectly impacted stakeholders
Public sector
Outcome Risks
Increased industrial activity may exacerbate pollution in the region. Corresponding improvements in waste management should follow investments.
Impact Risks
Investments in dedicated free trade zones may be made by certain business groups only and cause prolonged income inequalities or dependency on foreign interest.
Impact Classification
What
Free trade zones and cargo capacity at ports increases regional manufacturing output, improves intra-regional trade and enhances value chain development.
Risk
While the model of free trade zones and cargo capacity at ports are proven, the potential exacerbation of pollution and income disparities leading to regional divide require consideration.
Impact Thesis
Increase regional manufacturing output, improve intra-regional trade and enhance value chain development.
Enabling Environment
Policy Environment
Vision Djibouti 2035, 2014: As the strategic framework for development planning by the Government of the Republic of Djibouti, the key premises of the country's development trajectory are analyzed with respect to being a regional maritime outlet, which offers cargo opportunities (27).
Strategy for Accelerated Growth and Employment Promotion (SCAPE) 2015-2019, 2014: Accentuates the prominent role of transportation in the country's economy and growth strategy (28).
Horn of Africa Initiative Ministerial Roundtable, 2021: Joint Presentation by the African Development Bank, the European Union and the World Bank covers key messages and pillars for the regional development scheme, which includes infrastructure and cargo facilities at ports (11).
Financial Environment
Financial incentives: The World Bank announced support of USD 2 billion to the Horn of Africa through a lending programme under IDA19, which is the World Bank’s concessional financing window that provides low or no-interest loans and grants to the world’s poorest countries (28).
Fiscal incentives: Djibouti's Investment Code specifies three preferential regimes: Regime A, Regime B and Free Zone Code. The latter favours 100% foreign ownership, free repatriation of capital and profits, exemption from corporate and income tax, and flexibility to employ foreign nationals (27).
Regulatory Environment
Law No. 65, 2016: Concerns creation of Djibouti's free trade zone regime (26).
Law No. 186, 2017: Establishes Djibouti's Public-Private Partnership Act, following the Executive Decision No. 045 of 2016 to establish a Committee on the creation of a national legal and regulatory framework of 2016 (8).
Marketplace Participants
Private Sector
Great Horn Investment Holding (GHIH), China Merchants Group, Dalian Port Authority, IZP Group, China National Petroleum Corporation (CNPC), China Energy Engineering Group (CEEC), Exim Bank (Djibouti), Sahara Group, SOMAGEC, Vitol, Trafigura, Mercuria, MTBS
Government
Djibouti Ports & Free Zones Authority (DPFZA), Fonds Souverain de Djibouti (Djibouti Sovereign Fund).
Multilaterals
African Development Bank (AfDB), Horn of Africa Initiative (HoAI), World Bank (WB), European Union (EU), United Nations Conference on Trade and Development (UNCTAD), China-Africa Development Fund, Silk Road Fund.
Public-Private Partnership
Djibouti International Free Trade Zone (DIFTZ), Djibouti Damerjog Industrial Development Free Trade Zone (DDID FZE).
Target Locations
Djibouti: Djibouti (City)
Djibouti: Arta
Djibouti: Tadjourah
References
- (1) International Trade Centre (ITC). Services Snapshot Djibouti. 2012. https://www.intracen.org/uploadedFiles/intracenorg/Content/Redesign/Sector/Global_Services_Network_blog/Djibouti.pdf.
- (2) International Trade Centre (ITC). Trade in Services. 2021. https://www.intracen.org/itc/sectors/services.
- (3) AfDB, OECD, UNDP and UNECA. African Economic Outlook - Djibouti. 2012. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Djibouti%20Full%20PDF%20Country%20Note.pdf.
- (4) International Monetary Fund (IMF). Staff Report and Statement by the Executive Director for Djibouti. 2019. https://www.imf.org%2F~%2Fmedia%2FFiles%2FPublications%2FCR%2F2019%2F1DJIEA2019002.ashx&usg=AOvVaw1RvQ6tvZvxKs6LwvWu6SyA.
- (5) African Development Bank (AfDB). Djibouti Economic Outlook. 2021. https://www.afdb.org/en/countries-east-africa-djibouti/djibouti-economic-outlook.
- (6) International Centre for Trade and Sustainable Development, September. The Gender Dimensions of Services. 2016. https://www.tralac.org/images/docs/10585/the-gender-dimensions-of-services-ictsd-september-2016.pdf.
- (7) UNCTAD, UN Women & EU. Gender and Trade Assessing the Impact of Trade Agreements on Gender Equality: Canada-EU Comprehensive and Trade Agreement. 2020. https://unctad.org/system/files/official-document/UNWomen_2020d1_en.pdf.
- (8) Chambre de Commerce de Djibouti. Panorama du Secteur Privé Djiboutien. 2015. http://ccd.dj/panorama-du-secteur-prive-2015.
- (9) Djibouti Ports & Free Zones Authority. Djibouti International Free Trade Zone. 2019. https://dpfza.gov.dj/facilities/Free-trade-area/djibouti-international-free-trade-zone.
- (10) Republic of Djibouti Ministry of Social Affairs and Solidarity. Strategie Nationale De Protection Sociale (2018 - 2022). 2017. https://sociales.gouv.dj/uploads/Categorie/a67a59e47f5299fa40143635aa82722f.pdf.
- (11) Horn of Africa Initiative, June. The Horn of Africa Initiative Launches its Multi-Donor Trust Fund (MDTF). 2021. https://hoainitiative.org/the-horn-of-africa-initiative-launches-its-multi-donor-trust-fund-mdtf.
- (12) World Bank. From Isolation to Integration: The Borderlands of the Horn of Africa. 2020. https://reliefweb.int/sites/reliefweb.int/files/resources/The-Borderlands-of-the-Horn-of-Africa.pdf.
- (13) Djibouti Ports and Free Zones Authority (DPFZA). Djibouti International Free Trade Zone (DIFTZ). 2021. https://dpfza.gov.dj/facilities/Free-trade-area/djibouti-international-free-trade-zone.
- (14) Theo Notteboom, Athanasios Pallis and Jean-Paul Rodrigue. 2021. Port Economics, Management and Policy - Terminal Concessions and Land Leases. https://porteconomicsmanagement.org/pemp/contents/part3/terminal-concessions-and-land-leases/
- (15) World Bank Group. 2011. Special Economic Zones in Africa Comparing Performance and Learning From Global Experiences. https://documents1.worldbank.org/curated/en/996871468008466349/pdf/600590PUB0ID181onomic09780821386385.pdf.
- (16) Djibouti International Free Trade Zone. 2021. https://www.diftz.dj/SS-JBT.
- (17) World Bank. Database on Manufacturing, value added (% of GDP) - Djibouti. 2021. https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=DJ.
- (18) ILO. ILOSTAT. Proportion of informal employment in total employment by sex and sector. 2017. https://www.ilo.org/shinyapps/bulkexplorer43/?lang=en&segment=indicator&id=SDG_0831_SEX_ECO_RT_A.
- (19) World Bank. Database on Employment in Industry. 2021. https://data.worldbank.org/indicator/SL.IND.EMPL.FE.ZS?locations=DJ.
- (20) The International Bank for Reconstruction and Development / World Bank. Fostering Women's Economic Empowerment through Special Economic Zones : Comparative Analysis of Eight Countries and Implications for Governments, Zone Authorities and Businesses. 2011. https://openknowledge.worldbank.org/handle/10986/27441.
- (21) Aggarwal, Aradhna. Impact of Special Economic Zones on Employment, Poverty and Human Development, CRIER Working Paper No 194. 2007. https://icrier.org/pdf/Working_Paper_194.pdf.
- (22) World Bank. Database on . Unemployment. 2021. https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?locations=DJ.
- (23) Republic of Djibouti. Vision Djibouti 2035. 2014. http://ccd.dj/w2017/wp-content/uploads/2016/01/Vision-Nationale.pdf.
- (24) Strategy of Accelerated Growth and Promotion of Employment 2015-2019. 2014. https://economie.gouv.dj/wp-content/uploads/SCAPE-en-anglais.pdf.
- (25) Horn of Africa Initiative. Joint Presentation by AfDB, EU and World Bank. 2021. https://hoainitiative.org/wp-content/uploads/2021/04/Horn-of-Africa-Deck-FINAL-B.pdf.
- (26) Republic of Djibouti. Loi n°65/AN/94/3e L portant création du régime de Zone franche industrielle. 2016. http://www.ccd.dj/w2017/wp-content/uploads/2016/01/transport-logistique-et-entreposage.pdf.
- (27) Djibouti Ports and Free Zones Authority (DPFZA). Free Zone Code Incentives. 2021. https://dpfza.gov.dj/facilities/Free-trade-area/djibouti-free-zone,detailed in https://research.hktdc.com/en/article/MzU3MDc0MTQw.
- (28) Horn of Africa Initiative. World Bank prioritizes the Horn of Africa in its approach for regional integration in Africa. 2021. https://hoainitiative.org/world-bank-prioritizes-the-horn-of-africa-in-its-approach-for-regional-integration-in-africa.
- (29) Djibouti Damerjog Industrial Park (DDIP). Overview. 2021. https://ddip.dj/overview.
- (30) World Bank. Database on FDI. 2019. https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2019&locations=DJ-ET-SD-KE-SO-ER&start=1970&view=c.