Investment and reform to expand role of industry in Djibouti

Given Djibouti’s economic reliance on international trade and the scarcity of natural resources, manufacturing industries have always played a secondary role in the country’s economic development. However, authorities are now looking to boost their development as a means to cut unemployment and foster more sustained and inclusive economic growth.

Sector Size

In line with many emerging markets in Africa, Djibouti’s manufacturing sector has seen its contribution to GDP trend downwards in recent decades, with a limited share of 3.7% of GDP in 2014 compared to 8.1% in 1977 – a result in this instance of the country’s expanding focus on service activity.

As a result, there are currently just over 30 formal, large-scale, commercial manufacturing enterprises operating in the 850,000-person country, which is equivalent to just over 1% of the total number of companies. The firms are, by and large, focused on the domestic market as opposed to exports, with a number of companies operating in the building materials, beverage and mineral water, industrial gas, and plastic and paper production segments.

As a result, while activity was historically dominated by domestic investors, that is now beginning to change: Djibouti’s National Investment Promotion Agency (Agence Nationale de Promotion des Investissements, NIPA) noted an increased number of international industrial investment projects between 2010 and 2014, corresponding to 32% of the total projects approved by the Code of Investments. As the country continues to liberalise and seeks to expand its role as a gateway to East Africa, manufacturing activities are beginning to benefit.

Vision 2035

Improvements to the investment climate and governance framework form a central part of the Djibouti government’s Vision 2035 strategy for economic development and is key to facilitating the growth of industry in the country (see analysis). Under the plan, initiated in 2014, authorities aim to reinforce Djibouti’s human and financial capacities to improve its ability to conceive and conduct industrial projects as well as feasibility studies. Similarly, authorities are looking to build dialogue platforms with private operators to encourage their participation in the development of a public-private partnership framework and business climate improvements.

The plan also makes access to energy and energy security a primary strategic focus and envisages a power sector transition from 100% fossil thermal fuels in 2010 to 100% renewable energy by 2020. Moves made towards this transition will help to remove one of the primary barriers to industrial and manufacturing growth – high energy costs and unreliable supply (see Energy chapter). “One of the main issues facing the industrial development of Djibouti is the lack of access to affordable energy,” Hikmat Daoud, CEO of gas manufacturer and supplier Compagnie de Gaz de la Mer Rouge (CGMR), told OBG. “The government’s plan to emphasise renewable energy sources will allow the country to become more independent and offer better rates to active enterprises.”

Raising Competitiveness

Manufacturers in Djibouti, as is the case in many economies in Africa, face a number of challenges, including high input costs, but the country nonetheless has sought to increase its comparative advantages, particularly for export-oriented industries. One of Djibouti’s primary assets is its location as a gateway to a regional market of more than 400m people, including COMESA and GCC member states. The export opportunities this opens up are most visible with neighbouring countries South Sudan and Somalia, with easy access to Djibouti City and, in particular with Ethiopia, which has a population of 95m, and has, in recent years, seen economic growth as high as 10%. “With Djibouti’s excellent geographic positioning, the country serves as a gateway to the region,” Ahmed Osman Guelleh, chairman of Djibouti-based GSK Group, told OBG. “The expanding regional market offers a lot of opportunities for the introduction of new products. By creating a manufacturing industry in the country that appeals to the regional customer, Djibouti will be able to kick-start its industrial development.”

Upgardes

Much of Djibouti’s competitiveness as a manufacturing destination comes from recent reforms and upgrades to its soft and hard infrastructure. Djibouti’s maritime facilities, for example, are well-developed, with ample capacity, high productivity and a range of upgrades currently in the works (see Transport chapter), and the government has broken ground on a new railway and range of motorway upgrades. Perhaps most critically for a country in which electricity prices remain higher than the regional average, Djibouti has also inaugurated new interconnection projects and renewable energy facilities – under Vision 2035 – to increase the power supply. Djibouti currently hosts a number of free zones that offer investors a number of fiscal incentives and one-stop-shops (see Economy chapter).

By the end of 2014, these zones were hosting 189 tenants, and while the majority of them were classified as trade and financing companies, the authorities have told local media that they looking at bringing in manufacturers as well. “Djibouti has improved a lot when it comes to facilitating the registration of companies in the country. Whereas the procedure once took over 30 days we have brought this back to 24 hours,” Ouloufa Ismail Abdo, manager at Office Djiboutien de la Propriete Industrielle et Commerciale (ODPIC), told OBG. “Making use of digital tools, the companies can access the required documents online and present them in person, after which all data will be stored electronically.”

In March 2015 Djibouti and China Merchant Holding signed an agreement to develop a $3.5bn project called Djibouti Free Zone, which is targeting manufacturing activities, including electronics assembly, as well as providing regional distribution services. Nor is China the only one. “Turkey plans to use a manufacturing base in Djibouti to export goods to East Africa and beyond,” Ilyas Moussa Daweleh, Djibouti’s minister of finance and economy, told local press.

Building Materials

The building materials segment is currently the largest manufacturing sub-sector in Djibouti and is dominated by the production of cement. As a whole, Djibouti still imports roughly 65-70% of its needs in terms of building materials, with most of the imports coming from Turkey for steel, China for tile and ceramics and Pakistan for special cement. However, as Soubaneh Said Ismael, director-general at Laboratoire du Batiment, a materials testing laboratory, told OBG, “Demand for building materials should grow rapidly at a rate of 35-40% during the next few years, especially if the government implements the Vision 2035 roadmap.”

While specialty cement for major infrastructure projects has to be imported, the majority of domestic cement consumption is met by the output coming from the two main operators: state-owned Cimenterie d’Ali Sabieh (CDS) and UAE-based Nael Cement. These two plants were both built in 2013, with CDS’s nameplate capacity at 240,000 tonnes per year and Nael Cement’s at 220,000 tonnes per year. Combined, the two producers are able to meet more than 90% of current demand for cement – a figure that has risen over the years in the wake of the development of large-scale transportation infrastructure. “Local production of building materials can yield surprising benefits. For example, whereas international cement prices have been rising due to increasing petrol costs, locally produced cement has shown solid quality levels at a more competitive price,” Ismael told OBG.

Expanding Production

Thus far, both facilities have been importing most of their needs in raw materials, but CDS is now planning to move up the value-chain by extending its production of raw materials – including limestone, clay and sand – on top of gypsum, which it has been already extracting. All together, the company expects to produce 600 tonnes of clinker per day as of March 2016 to both meet its own needs and, potentially, to sell.

Yet, despite the growing demand for cement, the two companies have recently been operating at only one third of their capacities, which is equivalent to 200-215 tonnes per day out of a potential 600-650 tonnes, due to the fact that the recent large-scale infrastructure developments that are driving demand require a special Sulfate Resistant Cement (SRC) instead of the locally manufactured Ordinary Portland Cement. CDS is planning to start producing SRC in 2016 to meet this need, which, according to Yacoub Abdi Djama, managing director of CDS, is expected to quadruple during the next few years if the infrastructure projects continue to develop.

While cement accounts for the bulk of building materials manufacturing and comprises roughly 40% of Djibouti’s overall demand in terms of building materials, several other factories are also active in segments like brick and marble. Factories owned by Ecobrique, the country’s sole brick and ceramics producer, with a capacity of 100 tonnes of materials per day, and Al Gamil, a marble producer, allow Djibouti to meet 80% of its brick and marble needs locally, according to Ismael. India’s Fabtech is also planning to build a steel plant which should enable Djibouti to meet 60% of its building material needs.

FMCG

Due to the country’s primarily arid climate and its very limited size, Djibouti has had somewhat limited success in cultivating a large-scale agricultural sector (see Economy chapter), which naturally constrains the opportunities for most domestic agri-businesses and fast-moving consumer goods (FMCGs). However, in recent years, rising consumer demand has spurred some growth in the beverage industry.

The longest-running beverage manufacturer in the country is locally-owned Coubèche, a company founded in 1885, which was, at first, dedicated to ice production before gaining the bottling license for Coca-Cola’s carbonated soft drinks and mineral water in 1964. With current beverage production running at about 500,000 hectolitres in 2015, the company today holds roughly 95% of market share for soft drinks and 60% for mineral water. Its production plant is located on a 28,000-sq-metre site near the Port of Djibouti and occupies a plot covering some 17,000 sq metres in the industrial zone.

The direct employer of over 630 people, Coubèche is the sole local soft drink producer but competes with three local producers in the bottled water segment, namely: Eau de Tadjoura, a subsidiary of Dubai-based Lootah; Bio, owned by locally based SODICOM; and the latest arrival, Iljano, a company initially owned by the state that was bought by local AZKA group in 2014. As such, imports in the soft drink segment account for less than 5% of market share and 10% in the bottled water segment. “Overall, consumer purchasing power in Djibouti has been increasing,” Magda Rémon Coubeche, president of Coubèche, told OBG. “This has led to more demand for branded products and higher quality standards.”

Locally Driven

Local producers are well-placed to benefit from Djibouti’s steady headline growth. The demand for beverages rose by 14% in 2015 and is expected to increase by 6% in 2016. In the short term, Coubèche plans to increase capacity. “Demand is driven by the fast-growing disposable income of Djiboutian people, resulting from the recent wave of foreign direct investments (FDI) and rapid growth of job creation,” Christophe Chenot, director of marketing at Coubèche, told OBG.

Djibouti’s local dairy production base, established by Laiterie de Djibouti, a formerly state-owned company that ceased production in 2010 due to financing issues, could soon see a revival. According to the local press, the recent high rates of growth have prompted other investors, such as the locally owned GSK Group, to explore the possibility of opening a new milk and juice plant in the country. The opportunity to move up the value chain or expand capacity with an eye to exporting to other markets is more constrained, however. “Djiboutian manufacturing companies cannot yet invest heavily in costly industrial facilities and equipment, as they only rely on a limited domestic market for their return on investment and still struggle to be competitive internationally due to the high cost of utilities, like electricity,” Chenot told OBG.

Agro - Industry

Outside of the beverage industry, Djibouti is also seeing modest production in the fisheries segment and is largely able to address the majority of demand. While informal fishing activity is common, the sole formal processor is Red Sea Fishing, which collaborates with roughly 200 independent fishermen to collect and process their catch. In 2015 the country’s formal fish production amounted to roughly 2500 tonnes, equivalent to 90% of domestic demand, and this yielded an annual turnover of roughly $3m. According to Mahamoud Youssouf, managing director of Red Sea Fishing, “Local demand for fish has risen by 30% in recent years as meat prices have tripled and the expatriate community – a clientele who seeks out healthy food – has grown significantly.” In a bid to meet the increasing local demand in the country, Red Sea Fishing said it is working towards making further investments in boats and facilities in order to increase their total annual catch.

Potential

There is certainly plenty of scope for expanding capacity. The World Bank estimates Djibouti’s annual fish capacities are upwards of 30,000 tonnes, meaning that only 4.5-5% of the country’s fisheries potential is currently exploited, although increasing production will involve significant investment in equipment and skills training in the sector.

Fisheries already account for 2% of Djibouti’s GDP, equivalent to two-thirds of the share of the primary sector. Subsequently, the authorities are now looking to double annual fish catching capacities to 5000 tonnes by 2020 with the intention to fully satisfy the domestic market and target exports to Gulf countries, according to Youssouf (see Economy chapter). In line with this, the government is investing in an upgrade of the fishing port and establishing a food hygiene laboratory to ensure compliance with export standards. Nonetheless, for Youssouf, stepping up production remains the priority going forwards. “We need to first increase and consolidate our capacity for fish production before considering exporting and developing activities with higher added-value, such as canned fish production,” he said.

Low levels of activity are also ongoing in a broad range of other food-processing segments, although much of the activity remains outside the formal sector. Djibouti hosts one state-owned abattoir – currently under refurbishment – as well as a handful of cold rooms to store imported meat from East Africa Holding, a subsidiary of local group GSK. However, as meat from small ruminants, such as goats, accounts for 70% of Djiboutians’ total meat consumption, the potential for growth is significant, with domestic demand expected to rise on the back of higher disposable income levels. Djibouti already plays a role in animal husbandry and livestock exports through the Damerjob quarantine centre. Built in 2006 by the state, the $20m live cattle regional centre is managed by Saudi Arabia’s Abu Yasser International and ensures the transit of 2m cattle heads annually between the Horn of Africa and Gulf countries.

One of the biggest challenges to securing food supply locally in Djibouti is that the majority of the land is non-arable which, as Abdoulkarim Niazi, assistant director-general of retail company Al Gamil, told OBG, presents a challenge. “There needs to be a solution to the lack of agriculture available in the country and corresponding food insecurity by finding inventive ways to either produce the products possible, such as dates, or to expand the usage of land in neighbouring countries, like Ethiopia, from which foodstuffs can be imported at a lower price, instead of being transported all the way from Europe.”

Industrial Gas

Djibouti also produces industrial gas, via the locally owned CGMR. The plant currently produces oxygen, acetylene and nitrogen for Djibouti’s health care and construction sectors. With gas production capacity of 250 cu metres per hour, the company largely exceeds Djibouti’s needs in industrial gas and also exports to neighbouring markets such as Somalia. The development of transport infrastructure, including port extensions and railway developments, has increased demand for gas considerably, prompting India’s Fabtech to develop gas bottling activity in order to share in the expanding market.

Salt Mining 

With modest production of salt, basalt, brick clay, sand, gravel and dimension stones, mining still plays a role – albeit minor – in the economy, contributing 1% to GDP. Historically, salt has been the major mineral produced in the country, sourced from the hypersaline Lake Assal in the centre of the country. According to a report on the minerals industry by USGS, in 2000 there were 15 salt mining companies in Djibouti, which produced, in total, 120,000 tonnes per year, but the industry has shrunk over the past decade, and in 2010 it produced only 12,000 tonnes before activity nearly ceased altogether with the discovery of salt deposits in the Afar region of Ethiopia.

According to local media, in April 2012 a contract was signed by the Port of Djibouti, China Harbour Engineering and Salt Investment, a Djibouti-based company owned by the US’s Emerging Capital Partners, to develop Goubet Port, located 40 km south of the Gulf of Goubet and near to Lake Assal, into a hub for salt exportation. Pegged for completion in 2016, the $63m project will include a new ore terminal and product storage area and will redevelop the road linking the lake and the port.

Mineral Prospects

Gold is also the subject of exploration. Since 2013, UK-based Stratex International and Thani Ashanti Alliance, a joint venture of South Africa’s AngloGold Ashanti and UAE-based Thani Dubai Mining, have been awarded blocks at the Oklila prospect. JB Djibouti Mining, a unit of JB Group of India, also obtained a gold exploitation license in 2011. To stimulate further investment, the Ministry of Energy is working on an inventory of the country’s mineral resources in the hopes of sparking small-scale activity in outlying regions: the Ali Sabieh region, for example, houses deposits in sandstone, limestone and ornamental stones; Tadjourah has corallian limestone, clay and pumice; and the Obock region holds stores of ilmenite sand, corralian limestone and an abundance of ornamental stones.

Challenges

Across Djibouti’s various industrial subsectors, the general trajectory is a positive one, with investment increasing to varying degrees and a supporting legislative and incentive framework helping attract new arrivals. However, as with any emerging market, there are still plenty of bottlenecks to be addressed, including the constraints to growth resulting from the small size of the local market, which means that domestic producers must eventually look to export markets for further growth. Local industrial companies also suffer from the high cost of utilities. According to the Djibouti Enterprise Survey by the World Bank, some 49% of firms in Djibouti rated access to electricity as the biggest obstacle to daily operations. High labour costs are also limiting growth, as a non-qualified worker is paid, on average, $300 per month in Djibouti, compared to $70 in Ethiopia, $100 in Egypt or $170 in Mauritius.

Outlook

Within the context of the redistribution of the global industrial environment and, notably, the relocation of productive activities from China to African countries, Djibouti, as the gateway to East Africa, is well-positioned to supply manufactured goods to the surrounding landlocked countries. By encouraging FDI in its free zones, Djibouti has an opportunity to boost manufacturing activities. Meanwhile, the potential for growth in Djibouti’s subsectors, in particular cement and building materials, bolstered by the country’s ongoing infrastructure investments, is strong. With fisheries and salt mining set for growing investment due to rising local demand and efforts to strengthen the business climate, there is definite scope for industry to play a larger role in the economy.

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