Development Outreach

RK:

JAFZA in Djibouti is proving to be a successful free zone project in a difficult environment. What is the source of its success?

AC:

We see Africa as the next region that is about to take off. Costs in Asia are increasing and Africa is resource rich. The commercial potential of the continent is only going to increase. Djibouti’s location is what made it our choice for the project. The country is positioned on the Horn of Africa where 50 percent of the world’s sea trade passes by, linking Europe to Asia and the Gulf. As well, we saw an opportunity to make Djibouti a trans-shipment base for regional trade, both sea-based and inland to Africa.

RK:

How did the free zone project start in Djibouti?

AC:

In 2000 DP World took over the management of the Port of Djibouti. As we studied the potential in Djibouti, the Government of Dubai began to have a high-level discussion with the Government of Djibouti on what vision each side had for the country and that part of Africa. The agenda of the Government of Djibouti to develop the country and the agenda of Dubai World to create global business opportunities were compatible. At that time, Dubai World was beginning to act on its strategy to go global and seek investment opportunities outside of the Gulf.

RK:

Djibouti’s history is interesting. It was French territory until 1977, when the Afars and Issas joined to form the independent state of Djibouti under one-party rule. It experienced a civil war from 1992-2000, from which it recovered and held presidential elections. It currently has a border dispute with Eritrea, which was violent last year. Culturally, it is similar to Somalia, with ethnic Somalis on both sides of the border. Also, the economies of northwestern Somalia and Djibouti are deeply connected. How did the Djibouti government support the project?

AC:

The higher-level discussions between the Governments of Dubai and Djibouti helped form the relationship on which we could base our project, and the Government of Djibouti has remained consistently committed to it. In 2003, we did a feasibility study jointly with our in-house SEZ team and consultants we hired for the project. The feasibility study detailed the commercial case for the project and gave us tangible requirements for success that we brought to the Government of Djibouti. The Government endorsed our requirements, which were essentially that we have the freedom to implement our business model.

RK:

This brings us to an important question. The project in Djibouti involves more than just an economic free zone.

AC:

You are right, the Djibouti project was not just a JAFZA project. It involved a number of Dubai World subsidiaries coming together in an integrated development package. DP World rehabilitated the Port of Djibouti and now manages the port. It has constructed a new deepwater port that has been operational since January 2009, and is also managing the airport which will be rehabilitated. Djibouti Customs and Dubai Customs World operate the customs service. Nakheel built a new Five Star hotel and assigned its management to Kempinsky as well as some real estate development. Jafza International constructed and manages the special economic zone and is at planning stage for the development of a second special economic zone.

RK:

Is this part of the business model you mentioned?

AC:

Yes. By bringing in these different businesses under Dubai World, we took control of risk and could catalyze a critical mass of business activity that we were confident would only grow given the location features of Djibouti and the proximity of markets in the region.

RK:

In an economy like Djibouti’s, where the Dubai World brand is not well known locally, how is this critical mass of business activity to grow?

AC:

Well, I won’t agree that the brand is not known. But, the concept of an economic zone was a new concept and we had to communicate and spread this business model locally. Our global strategy is to create a network of projects. Starting with our flagship project in Dubai, the Jebel Ali Free Zone, we would like to cross market our brand across our network of free zone projects. The Jebel Ali Free Zone has about 6500 companies from 120 countries, 125 of which are Fortune 500 companies. Our network of projects asks how our infrastructure and business services can fit into the supply chains of our investors. By replicating our success outside of Dubai, we want companies to move with us to new sites, both taking advantage of opportunities offered by our projects and contributing to these opportunities to make them even better. By this means, we create investment inflows to our international project locations.

RK:

The clients that move with you to new project sites can be large companies. How do local companies fit into your projects?

AC:

SEZs offer liberal business environments with high service standards. In fact, I would say that local companies in particular draw benefits from locating in a SEZ. There is increased efficiency, guaranteed incentives, and a predictable operational and legal environment that can enable these companies to grow. Also, it creates opportunities for them to partner with international companies that are tenants in the free zone. One way we enable this in our zones is through Gazeley, a UK company that Economic Zones World acquired that specializes in warehousing logistics. They bring to our free zones a build-to-suit approach for customized logistics solutions, and also parcels business spacing and logistics for smaller companies whose needs as growing businesses are smaller and based more on trade than manufacturing.

RK:

I wanted to go back to the aspect of the business model that takes control of risk. In projects the size of the one in Djibouti, it seems that obtaining land would have been an important challenge, as well as how to interface with the local regulatory environment. How did the project meet these challenges?

AC:

Obtaining sufficient land on a free-hold basis was one of our requirements that we put to the Government early on in our high level discussions. We worked directly with the President rather than with ministerial and administrative parts of the Government of Djibouti.

RK:

But you would have had to deal directly with ministerial and administrative parts of the Government when working out how the free zone would interface with the business registrar, licensing bodies, and customs, for example. In our experience (that of the Investment Climate Advisory Service of the World Bank Group) the ministry level and administrative units of Governments can be a bit resistant when they perceive their authority to be challenged.

AC:

That is correct, and we did work directly with a wide range of administrative departments. We see the issues of land and the physical build-up of the free zone – such as installing the power and water supply, the office and warehouse space, and IT connectivity – as important but secondary to creating the right business environment. When we started the Djibouti Free Zone, we created a new Special Economic Zone law for Djibouti, established a free zone regulator that did not exist, and set-up a one-stop-shop for all business procedures inside the free zone. The one-stop-shop is a key part of our business model. We brought the model we use in Dubai to Djibouti: the same documents, the same procedural steps, nearly everything was lifted from Dubai and planted in Djibouti.

RK:

A new one-stop-shop is a difficult reality to harmonize with an existing system, especially when the one-stop-shop comes as a package. How did the existing bureaucracies respond to the creation of a new Government institution and parallel regulations?

AC:

This goes back to our relationship with the Government. Anytime we arrived at a bureaucratic block that we could not work out with a governmental administrative unit, we had recourse to appeal to the highest levels of Government. We found a way to harmonize the information flow between the Djibouti Free Zone and outside Government offices. To avoid any ongoing administrative conflicts, the one-stop-shop is separate from existing related ministries and is directly accountable to the President’s Office.

RK:

The creation of a new regulator is very interesting, even a bit unusual. Can you tell me more about this?

AC:

Djibouti did not have an existing free zone regulator at the start of the project, so we had to create one. Initially we acted as both regulator and operator of the free zone, but in a planned separation the regulator became independent. We obviously still work closely together, but the independence followed a period of capacity building around what is a regulator and what skills its staff should have to be effective and business-friendly.

RK:

In a way, this too is part of internalizing risk that is part of your business model.

AC:

That is right. To attract investment, it is crucial to have investor confidence, and this can be helped by a well-structured, empowered and business-friendly regulatory body. We had no intention of keeping control of the regulator, but we needed to build it up once we created it. As we are building a second special economic zone, the regulator will work with more than one free zone. The regulator therefore has to be a governmental body and not an in-house specialized regulator, and we also have to ensure that it is efficient since this is key to our project.

RK:

In addition to what you learned about how to make your business model work in Djibouti, what else would you say has been a good outcome for this project?

AC:

As you know, the SEZ in Djibouti is not just a project, but a new economic pillar in a country that has traditionally been rent-driven and until recently conflict-affected. The SEZ creates an environment conducive to foreign direct investment with the outcome of tangible job creation, a return of the Diaspora, and in general a dynamism that fuels the economy. Our objective is to transfer knowledge and skills so that there can be a potential cross movement of talents in our network of projects. As you know, we are developing a new project in Senegal, which is nearing its operational start date and DP World is already managing the port of Dakar. Key positions in Senegal are being staffed with Djiboutians who learned our business model in Djibouti, and know how to operate free zones and a port to our standards that upholds our global brand. The opportunity to leverage capable people from Djibouti to work in Senegal is a great way to leverage African talent—I myself am from Mauritius—which is for us another aspect of the success story that Djibouti has become.