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2011 Investment Climate Statement - Djibouti


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Openness To and Restrictions Upon Foreign Investment

Recent world-wide index rankings for Djibouti include:

Transparency International Corruption Perception Index: 91/178 (2010)

Heritage Economic Freedom Index: 139/179 (2010)

World Bank Doing Business Ranking: 158/183 (2009-2010)

MCC Government Effectiveness: 34% (FY2010)

MCC Rule of Law: 71% (FY2010)

MCC Control of Corruption: 92% (FY2010)

MCC Fiscal Policy: 51% (FY2010)

MCC Trade Policy: 2% (FY2010)

MCC Regulatory Quality: 42% (FY2010)

MCC Business Start Up: 14% (FY2010)

MCC Land Rights Access: 42% (FY2010)

MCC Natural Resource Mgmt: 44% (FY2010)

The Government of Djibouti (GODJ) recognizes the crucial need for foreign investment for the economic development of the country. Djibouti's assets include a strategic geographic location, an open trade regime, a stable currency, substantial tax breaks, and other incentives. Potential areas of investment include:

· Transport/Shipping: Djibouti's service-based economy revolves around its port business. A new fuel pier was dedicated in 2006, and a new USD 400 million container terminal in 2009;

· Services Sectors: Djibouti's financial services sector continues to grow, as do port-related services such as freight forwarding. There is also a lack of specialized medical care in Djibouti; many residents and expatriates currently travel abroad to receive such care;

· Energy: Djibouti has renewable energy potential in geothermal, wind, and solar. The government has signed agreements with several private companies and with other countries to begin developing these resources;

· Tourism: A large resort hotel complex, managed by the Kempinski Hotel Group, opened in October 2006 and recently completed an expansion. Unique eco-tourism and dive tourism resources exist but are underexploited;

· Manufacturing/Fishing Sectors: Djibouti currently imports almost all consumer goods; only small-scale fishing operations are present.

Djibouti's laws encourage foreign investment. In principle there is no screening of investment or other discriminatory mechanisms. Certain sectors--most notably public utilities--are state-owned and are not currently open to investors. Dubai World Group currently manages the Port of Djibouti (since 2000), Djibouti International Airport (since 2002), and Djibouti Customs (since 2005).

The most important foreign direct investment in Djibouti is the Doraleh Port Project, located just west of the current seaport. The Doraleh Port Project already encompasses an oil terminal (dedicated 2006) and a container terminal (dedicated 2009), and is slated to include a large industrial and commercial free zone. The Doraleh Container Terminal handles sixth-generation container ships, and serves as both the principal port for landlocked Ethiopia, and as a transshipment hub.

In 2008, the Al-Noor Holding Group announced plans to construct a bridge linking Yemen and Djibouti. This estimated USD 200 billion project would include the construction of two new cities, one on each side of the bridge, with a special economic status. This is an ambitious, generational project likely to take many years to complete. To date there is no further progress to report in this area.

The Ethiopia-Djibouti Railway Company (CDE)--jointly owned by the governments of Djibouti and Ethiopia--has for several years faced serious financial and technical difficulties, largely linked to aging machinery and tough competition from Ethiopian trucking companies. The European Union has recently donated 50 million Euros to help rehabilitate the CDE's narrow-gauge tracks and renovate several bridges. Recent attempts to establish private management of the CDE have failed, including negotiations with the South African company COMAZAR (2006) and the Kuwaiti Al-Ghanem Group (2008).

In April 2004, the Government of Djibouti conceded its fishing port to a private firm, Djibouti Maritime Management Investment (DMMI). A fish laboratory and a fish processing factory were inaugurated in 2009. However, local standards reportedly still fall short of the most stringent international export requirements. Three modern trawlers, received from Turkey in June 2010, are expected to increase fish production and upgrade the local fishermen skills.

Djibouti's National Investment Promotion Agency (NIPA), created in 2001, promotes private-sector investment, facilitates investment operations, and works to modernize the country's regulatory framework. The Minister of Investment Promotion--a position created in 2008--oversees NIPA. NIPA assists foreign and domestic investors by disseminating information and streamlining administrative procedures. Its ultimate goal is to serve as a one-stop shop for investors. NIPA identifies fishing, banking, insurance, tourism, health, and manufacturing as priority sectors for investment. In 2009, NIPA was particularly successful in attracting local companies to invest in Djibouti.

The government introduced a Value Added Tax (VAT) system in January 2009. The VAT consists of a flat rate tax of 7 percent imposed on companies with an annual turnover exceeding

80 million Djiboutian Francs (approximately USD 450,000). Whenever VAT is levied at 7 percent, other existing taxes on the same transaction are reduced by 7 percent. Between 2004 and 2008, the government lowered taxes on several categories of goods and exempted tax from basic food commodities to counteract inflation and encourage business sector growth.

Djibouti belongs to a number of regional groupings, including the Inter-Governmental Authority on Development (IGAD), and the Common Market for Eastern and Southern Africa (COMESA), which groups 19 countries into a common market of more than 300 million people. Djibouti is eligible to benefit from the African Growth and Opportunity Act (AGOA), and is also a member of the World Trade Organization (WTO). In addition, Djibouti is among the 34 African least developed countries with the option of entering the European Union Generalized System of Preferences.

Conversion and Transfer Policies

Djibouti has no foreign exchange restrictions. There are no limitations on converting or transferring funds, or on the inflow and outflow of cash. The Djibouti franc, which has been pegged to the U.S. dollar since 1949, is stable. The fixed exchange rate is 177.71 Djibouti francs to the dollar.

Expropriation and Compensation

Djibouti's Investment Code stipulates that "no partial or total, temporary or permanent expropriation will take place without equitable compensation for the damages suffered". The

Embassy is not aware of any recent act of expropriation or compensation related to foreign companies. Given the government policy of promoting private investment, none are expected. In December 2007, Djibouti and France signed a bilateral agreement regarding bilateral promotion and protection of investment, which, inter alia, extends legal protections to French investments in Djibouti. The draft of a revised Commercial Code, aimed at improving and modernizing the business climate in Djibouti, was finalized in December 2010 and is expected to be approved by both the Ministers’ Council and the Parliament during 2011.

Dispute Settlement

Djibouti's legal system is based on French law, and consists of three courts: a Court of First Instance presided over by a single judge; a Court of Appeals, with three judges; and the Supreme Court. The government has increased funding for the judiciary and recognized the need to increase the transparency and efficiency of the judicial process. International lawyers practicing in Djibouti have reported effective application of maritime and other commercial laws, but there have been occasional reports in the past from foreign companies operating in Djibouti that court deliberations were biased or delayed.

Judgments by foreign courts are in principle accepted by Djiboutian courts, and Djibouti is a member of the International Center for the Settlement of Investment Disputes. The

Djibouti Chamber of Commerce is planning to set up a Regional Mediation Center, designed to settle commercial disputes in a timely and transparent manner. In recent years there have been no investment disputes involving any US or other foreign companies in Djibouti.

Performance Requirements/Incentives

Performance requirements are not a pre-condition for establishing, maintaining, or expanding foreign direct investments. Incentives do, however, increase with the size of the investment and the number of jobs created: Tax benefits and incentives fall under two categories detailed in the investment code. Investments greater than USD 280,000 which create a number of permanent jobs may be exempted from license and registration fees, property taxes, taxes on industrial and commercial profits, and taxes on the profits of corporate entities. Imported raw materials used in manufacturing are exempted from the internal consumption tax. These exemptions apply for up to a maximum of ten years after production commences. Investment matters fall under the jurisdiction of the national investment board, which approves all investments.

Foreign investors are not required by law to have a local partner except in the insurance industry, and then only if the company is registered as a local company and not a branch of an existing foreign company. Djibouti offers significant incentives to private-sector individual and corporate investors. One U.S. firm that recently established a branch in the Free Zone hailed the speed and efficiency of the process. Establishing a local company outside the Free Zone is, reportedly, significantly more time-consuming. The Djiboutian investment code guarantees investors the right to freely import all goods, equipment, products, or material necessary for their investments; display products and services; determine and run marketing policy and production; choose customers and suppliers; and set prices. Foreign investors are also free to determine their own hiring and firing policy as long as it remains within the structure of the labor code.

Right to Private Ownership and Establishment

Djiboutian laws guarantee rights for foreign and domestic private entities to establish and own business enterprises, and to engage in all forms of remunerative activity. Legally established private-sector companies have the same access to markets, land ownership, credit, and other business facilities as do public enterprises. Although restrictions on private enterprises are minimal, competitive equality in regard to public enterprises, namely public utilities, remains limited.

Protection of Property Rights

There are sales of pirated trademarked products in Djibouti, especially in the informal market. Djibouti has a substantial informal sector and a large share of trade with several regional trading partners also occurs informally. Djibouti's legal system, inherited from the French, officially protects the acquisition and disposition of all property rights and safeguards intellectual property, patents, copyrights, trademarks, and trade secrets. In addition, Djibouti ratified the World Intellectual Property Organization (WIPO) convention, the Paris Convention on the Protection of Industrial Rights, and the Bern Convention on the Protection of Literature and Art Works. In July 2006, Djibouti passed an additional law (Law 154) enforcing the protection of copyrights. In April 2009, the government created the Office of Industrial and Commercial Property Rights, and passed a comprehensive law on the protection of property rights in July 2009. In practice, protection of intellectual property rights has not been strictly enforced.

Transparency of the Regulatory System

Djibouti's Port, Free Zone, airport, and customs service are now managed by Dubai Ports World. With the port and its related activities accounting for much of Djibouti's formal economy, the effect of Dubai World's private management has been substantial. Port and customs revenues have increased significantly, and shippers note striking improvement in the transparency and efficiency of those operations. There are ongoing efforts to foster similar transparency in the rest of the economy, but bureaucratic obstacles and delays are often a problem.

Efficient Capital Markets and Portfolio Investment

Two large French commercial banks, Indosuez Bank and Bank for Commerce and Industry (which is partially owned by the Government of Djibouti), dominated the banking system for years. While these two banks still account for the lion's share of deposits in-country, they now face competition from eight new banks, all established in Djibouti between 2006 and 2010. Bank of Africa (BOA) reached an acquisition agreement with Indosuez Bank in August 2010. BOA, which will operate in 2011 under the name BOA Red Sea, has the Moroccan Foreign Trade Bank (BMCE) as principal shareholder. Credit is allocated on market terms, and foreign companies do not face discrimination in obtaining it. However, generally only well-established businesses obtain bank credit, as the cost of credit is high.

Djibouti's eight new commercial banks are: the International Commercial Bank, a Malaysian firm recently listed in London; the Saba Islamic Bank of Yemen; the Bank of Deposits and Credits of Djibouti, a bank backed by Swiss capital; Salam African Bank, an Islamic bank with shareholders from East Africa; the Agricultural Bank of Yemen; Dahabshill Bank International, an Islamic bank owned by Dahabshill Money Transfer; Shura Bank from Egypt; and a Lebanese-Iraki bank, WARKA Bank. Exim Bank from Tanzania has also received a license from the Central Bank and is planning to start operating during 2011. Deposits in the new banks have grown by more than 25 percent since January 2009, while their loans grew spectacularly at more than 220 percent during the same period. Nevertheless, the new banks have captured only some 10 percent of the market, according to the Central Bank of Djibouti. Only an estimated 8 percent of Djiboutians hold formal banking accounts, and the government has actively encouraged expansion of banking services--for example by guaranteeing access to a banking account for citizens earning above a set monthly salary, and by paying government salaries electronically.

Competition from State-Owned Enterprises

Djibouti's most important economic engines--including its port, airport, and customs service--are privately managed by Dubai Ports World. By contrast, a small number of services and utilities remain under the control of legal monopoly state-run enterprises. Telecommunications services are provided exclusively by Djibouti Telecom, while electricity is provided by Electricity of Djibouti (EDD) and water by the National Office for Water and Sanitation. State-run services in a handful of other areas--such as municipal garbage collection, real estate, and social security--do not hold legal monopolies, but are afforded material advantages by the government (such as government-backed loan guarantees in the real estate sector). There are also state-run media outlets (television, radio, and print), and a state-run railway company (jointly owned by the governments of Djibouti and Ethiopia).

Senior management of state-owned enterprises reports directly to appropriate line ministers, but also answer to an Administrative Council. State-owned enterprises are required by law to publish an annual report, which is submitted to the National Assembly. The Chamber of Accounts and Fiscal Discipline is charged with auditing state-owned enterprises.

Corporate Social Responsibility

There is nascent but growing awareness among both companies and consumers in Djibouti of internationally accepted corporate social responsibility standards. Well-established local companies have long supported charitable causes, and consumers look favorably on companies which practice good corporate social responsibility. In 2010, USAID facilitated the first ever public-private partnership in Djibouti when Dubai Ports World funded construction of an HIV/AIDS information center in collaboration with the Ministry of Health.

Political Violence

In recent years, Djibouti has offered a stable political environment as a result of a peace agreement signed in 2001 between the government and an armed opposition. In 2010, the Parliament amended the Constitution to allow President Guelleh to run for a third mandate in the upcoming presidential elections in April 2011. The opposition in the country and abroad has strongly contested the legality of the amendment of the Constitution and demonstrated peacefully. An ongoing border dispute with Eritrea, which led to fighting in June 2008, remains a potential source of instability in northern Djibouti. In 2010, the governments of Eritrea and Djibouti agreed to begin talks mediated by Qatar. Presently, the Eritrea-Djibouti border is monitored by Qatari peace-keepers.

Corruption

Corruption exists in Djibouti and sometimes becomes an obstacle to investment and business development. Privatization of port, airport, and customs operations continued to substantially increase transparency and government revenues in the most important sectors of the economy. Recent major foreign investors have reported that they have operated free of government interference or corruption, and the government of Djibouti has pledged to protect as well as welcome new investment. However, there have been reports in the past of government officials applying pressure on smaller investors to become their "partners" or to obtain sub-contracts. Despite a substantial improvement in customs transparency under Dubai World's management, there are still reports of business owners attempting to bribe officials to evade import taxes. While there are occasional allegations of corruption in the judicial system, public perceptions of judicial transparency continue to improve. Two magistrates were dismissed in 2007 as the result of an investigation into judicial misconduct. In late 2009, the Director of the public garbage collection agency (OVD) was investigated for embezzlement and terminated as a result. In 2010, the Director of the “Fonds Routier”, a public service in charge of collecting road fees was also dismissed for the same reason.

However, prosecution and punishment for corruption has been relatively rare. The Chamber of Accounts and Fiscal Discipline (CAFD) has the authority to verify and audit all public establishments for transparency and accountability, and to implement necessary legal sanctions. The CAFD has reported on cases of lack of transparency and accountability in governmental agencies.

The State General Inspection (SGI), another government institution, complements the work of the CAFD by ensuring that human and material resources in the public sector are properly utilized. In 2009, the SGI completed an audit of ministries' inventories of government property, in collaboration with the Ministry of Finance's own inspector general. The CAFD and SGI are mandated to produce regular reporting, although in practice these reports were not always completed in a timely manner. In 2009 state-run media began to air anti-corruption public service announcements developed in conjunction with the SGI. The public service announcements were aired twice a week in four languages. At the eve of 2010, by request of the SGI, the government announced and implemented the policy of confiscating all government owned vehicles illegally carrying private plate numbers.

Bilateral Investment Agreements

Djibouti has several bilateral investment agreements, including with France, Ethiopia, Yemen, Egypt, Malaysia, Sudan, and India. Other treaties to which Djibouti is a party include:

· the Partnership Agreement between the Members of the African, Caribbean and Pacific Group of States (ACP);

· the Agreement for the Promotion, Protection and Guarantee of Investment Among

Member States of the Organization of Islamic Conference;

· the Articles of Agreement of the Islamic Corporation for the Insurance of Investment and Export Credit; the Unified Agreement for the Investment of Arab Capital in the Arab States; and the Arab Authority for Agricultural Investment and Development.

OPIC and other Investment Insurance Programs

Djibouti is eligible for Overseas Private Investment Corporation (OPIC) programs, and OPIC has supported Djibouti based projects. Djibouti is a member of the Multilateral Investment Guarantee Agency (MIGA), which issued its first guarantees in Djibouti for the Doraleh Port Project.

Labor

School attendance is compulsory until the age of sixteen, and gross enrollment rates have risen from approximately 38 percent in 1998 to approximately 73 percent in 2010. However, vocational and professional training facilities remain limited. Skilled Djiboutian workers--especially in highly demanded trades such as construction--are in short supply. The GODJ is more and more committed to providing high skills training to Djiboutian workers. In January 2010, the National Agency for Employment, Training, and Professional Integration (ANEFIP) signed an agreement with Pacific Architects & Engineers, Inc. (PAE) to provide the latest technical skills to graduates of the CFPA, a local vocational school. Similarly, the GODJ has initiated a program where local companies recruit trainees and receive tax breaks in exchange. Since 2007, USAID has been funding a workforce development program on a small scale; it included the licensing of 50 youths in truck and bulldozer driving skills. The government of Djibouti and the Port of Djibouti remain the nation's main employers. However, there are also growing private sector employment opportunities, as well as jobs created by the presence of French and American military forces in Djibouti.

By law, all employers are obligated to provide social security to their employees, through the National Council for Social Security. Wages in Djibouti are relatively high compared to other countries in the region. This reflects influence from historically high pre-independence French pay scales, and the high cost of living.

Widespread use of the legal narcotic khat substantially impacts both employee performance and family incomes. Large portions of the Djiboutian male population consume khat, a mild narcotic leaf imported from Ethiopia on a daily basis, and spend a considerable percentage of their income to purchase it. Major employers are increasingly forbidding use of khat by their workers, but khat use remains the norm in most sectors of the economy.

The Labor Code allows for employees to form labor unions. It also provides guidelines on wages, overtime pay, annual leave, sick leave, work schedules and holidays. A new 2006

Labor Code was criticized by labor unions, who have asserted that it gives more rights to employers at the expense of workers. Two large labor unions exist in Djibouti, but only the Djiboutian Workers Union (UDT) is recognized by international organizations. Unions have accused the government of Djibouti of interfering in their internal affairs.

In December 2007, the government created a National Agency for Employment, Training, and Professional Integration (ANEFIP). One of the objectives of ANEFIP is to become a viable interlocutor for investors. ANEFIP maintains a database of Djiboutian job-seekers with various educational backgrounds and kinds of experience. ANEFIP also issues work permits to foreign workers.

Foreign Trade Zones/Free Trade Zones

In 1995 the entire country of Djibouti was designated a free-export processing zone. Any company working exclusively for export in the industrial sector is eligible for designation as an Export Processing Company (EPC). The 17-hectare Djibouti Free Zone has been operational since 2004. It has the capacity to house up to 100 companies, and is approaching full capacity but an additional building of about seventy offices is planned for 2011 to accommodate more companies. As a result of financial problems in Dubai, several Emirati companies did not renew their registrations at the Djibouti Free Zone in 2009. An expanded free zone is planned as part of the Doraleh Port Project, although no date has been set for construction. Additional free zones in the planning stages include an international airport free zone, and an automobile and heavy equipment free zone.

Foreign Direct Investment Statistics

The largest source of Foreign Direct Investment (FDI) in Djibouti remains the Doraleh Port Project. Other FDIs include the construction of the five-star Kempinski Palace hotel, other construction and real estate growth, a U.S.-led salt extraction project at Djibouti's Lac Assal, and nascent projects in the renewable energy sector. In addition, all the commercial banks operating in Djibouti have full or majority foreign ownership.

The following data on annual FDI, from Djibouti's Central Bank, show that estimated FDI in 2009 decreased somewhat. This trend is expected to continue in 2010, largely due to ongoing financial problems in Dubai:


(USD million)

2003: 38.54

2004: 22.54

2005: 59.04

2006: 163.60

2007: 193.00

2008: 234

2009: 100

2010: 74(estimated)




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