by Thierry Pairault

Overall Context* Translated from French (Source :  Espace Géographique et Société Marocaine)

The article examines the financial and trade aspects of China Merchants’ presence in Djibouti, particularly in its port. 

African ports don’t play a major role in the worldwide arena. Tangier Med, the leading terminal in Africa is ranked 50^thin the world’s list of Lloyds; Alexandria terminal, the 2^ndin Africa, is positioned at the 88^thplace in the world scale. Both these terminals are North African ports prioritizing Mediterranean and especially European connections with Tangier Med operating also on some African ones. This lack of importance in the world scale may also be observed in the port throughput in standard containers twenty feet equivalent (TEU). In 2016, African ports’ TEU represented only 4% of the world container throughput. 

In this context, African ports represent an attractive developing domain for many international companies. However, these companies could enter and invest in African ports only after the start of ports’ privatization processes since the early 90s.

China Merchants context 

China Merchants was formerly known as China Merchants Holdings International Company Limited (CMHI) and changed its name to China Merchants Port Holdings Company Limited (1) (CMPorts) in June 2016. The company was founded in 1872 and is headquartered in Hong Kong. CMPorts is a subsidiary of China Merchants Group Limited (CMGL). 

At the end of 2017, CMGL was one of the 97 largest Chinese state-owned enterprises under the direct supervision of the central government through the Committee for the Control and Management of State Assets (SASAC). CMGL is fully owned by the Chinese government. Its main subsidiary, China Merchants Steam Navigation Co (CMSN) is owned only at 62% and the difference results from a capital raising on the Shanghai Stock Exchange.  The acquisition of Sinotrans Shipping and Container Service Charge Shipping by China Merchants Steam Navigation in April 2017, allowed the latter to have a maritime transport fleet that placed it third in the world with a total of 32,95 million gross tons (45 million gross tons including the ordered ships). 

The CMPorts is primarily accessing the African continent through port infrastructures and their management, and in 2018 its main entry points were:

• Thesar Maritime Limited (TML): in 2012, CMPorts acquired 50% of the Cypriot TML shares for 150 million euros. In 2011, Cypriot TML had been granted a concession of 35 years (extendable for 10 years) on the container terminal of Lomé (LCT). The other half of shares were owned by Terminal Investment Ltd (TIL) a subsidiary of the Italian-Swiss shipowner Mediterranean Shipping Company (MSC). 
• The port of Djibouti: Since December 2012, China Merchants Ports holds 23.5% of shares in the managing company of the Port of Djibouti - Port of Djibouti SA, a privatized public company controlled by the government of Djibouti 
• Terminal Link: Terminal Link is a port terminal operator, which in 2001 became a subsidiary of CMA-CGM Group. In June 2013 Terminal Link sold 49% of its shares to the CMPorts. This agreement gave the Chinese operator access to fourteen terminals, three of them being in Africa: Eurogate Tangier in the port of Tangier (part of CMPorts, 19.6%), Somaport in the port of Casablanca (part, 48.75%) and Terra in the port of Abidjan (part, 12.25%)
• Tin-Can Island Container Terminal (TCIT): in 2015, the Israeli shipping company Zim sold 47.5% of its shares to a consortium formed by CMPorts and China-Africa Development Fund (CADF) that would hold respectively 28.5 % and 19% of the shares of TCIT in the port of Lagos. It is thought that CMPorts will manage the CADF units without being able to override the third shareholder, Bolloré Africa Logistics (BAL) which holds the absolute majority (52.5%).
• Bagamoyo Port and Industrial Zone (Tanzania): The idea for this project was launched in 2007 and aimed to relieve the port of Dar es Salaam to meet competition from the Lamu Port in Kenya. CMPorts was involved in this project very early and on November 10, 2017, signed a project proposal approved by the Tanzanian government. CMPorts now has to convince the Chinese authorities to finance this project.

All these projects have a common element, the “Shekou model”. The “Shekou model” is the one China Merchants is trying to duplicate in the concessions it manages in Sri Lanka (Hambantota port), Australia (Newcastle port) or Africa (Djibouti, Lomé). The origin of this model is the Shekou Industrial Park in Guangdong, established in January 1979. That was China's first “special economic zone” example. The heads of the China Merchants summarize the model by the formula “the port in front, the (industrial) park in the middle and the city behind”. The rationale for this development model would be that an active port with a free industrial zone would attract businesses, which in turn would bring the need for labour force, and then for a new city with all its urban services to host this new labour force. 

Djibouti – an African “shekou”

Since December 2012, CMPorts holds 23.5% of the shares in the Djibouti Port SA, a privatized state-owned enterprise controlled by the government of Djibouti. Since then, Chinese companies have embarked on a large number of construction projects and infrastructural developments including a pier for salt loading constructed by China Harbor Engineering Co (CHEC) with the cost of $64 million, financed by a loan subsidized by the ExIm Bank of China, and a small multipurpose dock built by the CMPorts in Damerjog near the Somali border. 

Baoye group was in charge of the development of the port of Tadjourah, a project funded by the Arab Fund for Economic and Social Development (AFESD) ($61 million) and by the Saudi Fund for Development (FSD) ($25 million). 

The investment of the Djiboutian government for the multifunctional terminal of Doraleh of 580 million dollars was financed by a loan with a subsidized rate of the ExIm Bank of China. The construction was carried out by the China State Construction Harbor Construction and the heavy equipment, especially cranes made in China, were provided by the Zhenhua Port Machinery Co (ZPMC).

In the frame of the Shekou model, it was also important to develop an inland port with a special fiscal status and managed by the Chinese operator. To convince the Djiboutian authorities, China Merchants mobilised the advice of Lin Yifu and his team. In December 2015, during his first trip to Djibouti, Lin Yifu met with President Guelleh to discuss his ideas on development. A few months later, on May 9, 2016, Lin Yifu together with Hu Jianhua, vice-CEO of the CMPorts, handed over to Omar Guelleh the report entitled “Djibouti's Free Trade Zone and Economic Transformation: Towards a New Structural Economy”.

On January 15, 2017, Hu Jianhua signed a contract for the extension of the current free zone of Djibouti which would begin with the creation of a pilot area of ​​2.4 square kilometres. This contract was supplemented by a financial and organizational arrangement under which the CMPorts would provide a loan of $150 million for financing the development of the free zone.

The mechanism of the loan is double-fold. First, there was the control structure called the Djibouti Asset Company (DAC) de jure registered under the name of Khor Ambado Free Zone Company. DAC is a company governed not by Djiboutian law, but by the more advantageous one of the free zone. In practice, the CMPorts lends to the DAC which in turn lends to the Port of Djibouti SA - where CMPorts is a shareholder. This loan is backed by the Ports and Free Zones Authority of Djibouti, which deposited as a guarantee 15.3% of its shares in its subsidiary Great Horn Investment Holdings SAS which itself held 76.5% of the shares of Port of Djibouti SA.

It means that during the time of the loan, CMPorts manages 38.8% of the rights of the company Port of Djibouti SA. Furthermore, there exists a structure called O&M Joint Venture which is also registered as a free zone company under the name of East Aden Holding Company. This structure is composed of the Djiboutian Port Authority (40% of the shares), but also of a joint venture (60% of the shares) registered in the free zone to represent five Chinese companies, respectively the four previous actors and the fifth one, the Chinese IZP Network Technologies Co which is a significant actor of the China Merchants’ Djiboutian adventure. 

Djibouti and the digital silk road

Since 2005, Djibouti Telecom has been working to transform Djibouti into a regional telecommunications hub. These objectives are taken up and expanded by the CMPorts partners. In this context, IZP represents the development of the new digital silk roads. Founded in 2008, IZP is a company under the supervision of the National Information Centre, which is part of the National Commission for Development and Reform. IZP originally focused on data mining. After that, in late 2015, it was commissioned to create and manage a big data centre related to the new digital silk roads. In 2014, it obtained a license to provide cross-border payment services through the $150 million acquisition of Globebill, an electronic payment platform based in Shenzhen.

IZP restructured Globebill and its development was so considerable that in November 2015, China Merchants decided to invest $60 million (15% of the shares) in the idea of ​​having an ad-hoc service for its internationalization. In April 2017, the foreign exchange regulator proposed to suspend the license following a risk assessment control. However, on January 2018, the Central Bank gave to Globebill just a fine of € 250,000 for violating the money-laundering regulations. And, on February 28, 2018, it published on its website two statistical tables attesting the absence of risks related to its operations.

IZP and the China Merchants Group have also established the Silk Road E-Merchant Information Technology Co. Ltdto serve as a platform for a Global Ports Alliance, which would already include 29 ports and 55 terminals with a capacity of 80 million standard containers.

The role of IZP in this scheme is to make payments directly in Chinese currency - upon clearing agreements signed between foreign central banks - relying on its subsidiaries, Globebill and especially the International Business Settlement (IBS). 

Djibouti has a special place in the scheme of submarine cable networks. In this context, Huawei Marine with the support of the China Construction Bank, proposed to install a submarine cable, the Pakistan East Africa Cable Express (PEACE), connecting Gwadar and Karachi in Pakistan to Djibouti and Kenya before being extended to Egypt and South Africa. 

At the end of 2016, various agreements were signed between China and Djibouti including the establishment in Djibouti of the International Silk Road Bank, the East Africa Financial Centre and the Africa Big Data Centre headquarters

The couple IZP and China Merchants may also be found in Lomé whose port can receive post-Panamax container ships (whose size is greater than the maximum size for the passage of the Panama Canal). The terminal of capacity of two million standard containers is managed by TIL-MSC in partnership with China Merchants. It was in August 2012 that CMPorts bought 50% of the shares of TML which had a concession on the Lomé container terminal (LCT).

In 2016, Djibouti's deficit with China amounted to 12% of Djibouti's GDP and accounted alone for nearly two-thirds of the country's trade deficit. Only for the work accomplished in 2016, the State of Djibouti is indebted of 841 million dollars (against 1.1 billion dollars in 2015); this sum will be settled either in cash or by instalments - since Djibouti has financed many of its infrastructure investment projects through loans mainly from the ExIm Bank of China. 

This situation that is not unique to Djibouti, gives the image of a China that is not primarily an investor but essentially a supplier of goods and a service provider. Zhenhua Port Machinery Co or Baoye serve as suppliers to the Djibouti government, China Harbor Engineering Co or China State Construction Harbor Construction are involved more as service providers, and CMPorts, is both. 

The presence of CMPorts in Djibouti or Lomé signifies another characteristic of the Chinese presence in Africa: experimenting in a friendly, even permissive environment. This is what the case of the CEO of Humanwell taught us, by failing in the United States for non complying with health standards, and succeeding in Africa where the constraints are lesser.