Building Dubai in Africa: Seeking to join the hub club,
by Vincent Rouget.
A growing number of governments across Africa are casting envious glances at the economic success of Dubai and Singapore, and want to replicate their model. Countries are lining up to become commercial gateways into Africa, capturing a portion of inbound global trade and providing a services platform for their regions. As well as the inherent appeal of a hub model in a fast-moving globalised economy, external factors have shaped this agenda, chief among them China’s gradual refocusing of its Africa investment policy away from simply securing natural resources towards establishing efficient infrastructure for trade.
However, countries seeking to emulate the success of Dubai or Singapore must do more than follow their rush to create shiny new infrastructure. Investors expect long-term political stability, basic services to work, skilled workforces and a promising market. And with so many looking to become new hubs, competition will bring over capacity and see some fall by the wayside.
Small place, big plans
For many years after gaining independence in 1977, Djibouti was little more than a dot on the map, sitting beside the Red Sea on a parched, windswept expanse of land no larger than Slovenia or New Jersey. Long ignored by international powers and the global economy alike, over the last 15 years it has witnessed a steady rise to prominence. The country is now home to US, French, Japanese – and soon Chinese – military bases, and in the last decade has seen a spectacular 500% growth in maritime traffic at its main multi-purpose port of Doraleh, where a massive expansion project is due to be completed in 2017.
And it has no intention of stopping there. Djibouti wants to establish itself as a major commercial hub. In 2015, the government unveiled an ambitious ‘Vision 2035’ plan, inspired by Dubai’s rise from quiet fishing harbour to a global centre of trade and services. Its government has embarked on an array of infrastructure investments worth around USD 15bn that include large-scale port upgrades, a new airport, oil and water pipelines, a railway and several fibre optic cables, all heading west towards Djibouti’s larger neighbour Ethiopia. Djibouti appears to be finally exploiting its advantageous location on one of the world’s major shipping arteries, a rare haven of stability in a troubled region.
The hub club
Like Djibouti, most African aspirants to emulate Dubai or Singapore are small in size and relatively lacking in resources. In a continent where 90% of international trade happens by sea, a coastal location is a strong asset, but not a pre-requisite. Landlocked Rwanda shares a similar vision of becoming an ‘African Singapore’, a dynamic hub servicing the Great Lakes region and beyond. The country is opening its doors to foreign business, promoting digital technology and innovation, and making bold strides towards developing outside connections, including infrastructure investments in a new airport and a dry bulk port. National carrier Rwandair aims to open routes to Mumbai and Guangzhou in 2017 and London in 2018. In West Africa, a more discreet contender is Togo, hoping to use its growing regional airline (ASKY) and the natural deep waters of Lomé port to emerge as the main transfer hub for the region.
The Dubai frenzy has infected larger countries too. Kenya’s ‘Vision 2030’ plan vows to ‘bring Dubai to Kenya’. Infrastructure upgrades are again a major pillar of this strategy, with flagship projects under way for a new free trade port in Mombasa and a new East African railway. The government has multiplied efforts to woo foreign businesses to locate their Africa headquarters in Nairobi and promote the capital’s fast-growing tech hub. In Cameroon, the government hopes to make the newly inaugurated deep-water port of Kribi a trading gateway for the entire west coast of Africa.
Hub hopefuls looking to connect to global trade networks will present promising investment opportunities for infrastructure companies, as they upgrade their transport and logistics capabilities. With nearly 20 greenfield or upgrade projects throughout the continent – including five in Djibouti alone – port and shipping infrastructure will top the list of priority projects, but countries seeking to position themselves as multi-purpose traffic platforms will also invest heavily in air, rail and pipeline links.
Alongside infrastructure investments, aspiring Dubai imitators will also be looking to create a reputation for ease of doing business by giving foreign investors the red-carpet treatment. Countries such as Rwanda, Kenya or Djibouti are all engaging, with varying degrees of success, in reform programmes to cut red tape, and streamline customs and administrative procedures. In many cases, investors will be treated to generous investment incentives, such as tax holidays or expedited immigration processes. The Djibouti Ports & Free Zones Authority (DPFZA) offers interested partners an incentive package including corporate tax exemption, no restrictions on foreign ownership, and 100% repatriation of capital and profits.
Far to go
The ‘new Dubai’ narrative should nevertheless be read with caution. It will take more than infrastructure upgrades and generous investment incentives to turn the likes of Djibouti or Rwanda into efficient commercial hubs. While many of these hub candidates have enjoyed political stability in recent years (albeit of the authoritarian variety), the reality of doing business remains cumbersome and the pace of the many reforms needed to ease operating conditions has been sluggish.
Reforms to port governance in many countries become embroiled in political disputes or hampered by vested interests and lobbies. The infrastructure associated with attractive investment destinations – including easy access to electricity – remains poor, as does the local skills base. These structural constraints have not always garnered the necessary attention from political elites often more attracted by glitzy mega-projects and ribbon-cutting ceremonies.
Lack of a solid hinterland or a growth corridor capable of supporting the hub can be another major obstacle, given the small size of these countries’ domestic markets. Some have tied their fortunes to the progress of a key partner – like Djibouti with Ethiopia – making them vulnerable to a downturn in bilateral relations, and any economic or political misfortunes in the neighbour. Rwanda may rank among Africa’s top countries for doing business, but lies in the midst of the troubled Great Lakes region, with few prospects for its direct hinterland to grow in the near term. Regional integration has made steady progress, but in many cases remains too shallow to allow hubs to effectively serve a regional purpose.
Too many hopefuls
Regional rivalries increase the risk of over-supply. There are signs that some projects are driven less by sound economic logic than by political ambition and the prospect of easy short-term debt financing from China. These could prove economically unviable and even impose an excessive burden on public finances, raising longer-term sovereign risks.
This is particularly the case along the East African coast, where fierce regional competition has led many to wonder about the sustainability of having several large-scale projects servicing the same, limited market. On coming to power in late 2015, Tanzanian President John Magufuli announced that he would suspend his predecessor’s plans for a USD 10bn mega-port in Bagamoyo, describing the project as an unnecessary drain on public resources. But such signs of moderation are rare, and over-capacity issues are likely to dog several current projects in the next decade.
Overall, the pool of aspirants to the status of leading commercial hub fails to fully convince. But even Dubai wasn’t built in a day, and investors will find a wealth of opportunities and improvements to the business environment as ambitious development plans are set in motion. When judging how far any of these hopefuls manage to emulate the success of Dubai and Singapore, investors will need to look carefully at their willingness to undertake the less glamorous structural changes, prospects for longer-term stability, and at political and investment prospects for their wider regions, to make sure there is something worthwhile through the gateway.