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Wednesday, 13 February 2019

Legal battle for control of Djibouti Ports comes to Hong Kong

One of the world’s largest port operators has sued a Chinese state enterprise in Hong Kong over infringement of its exclusive port agreement with a strategically located African nation, in the city’s first court case involving China’s Belt and Road Initiative.



FactWire has obtained a legal filing by United Arab Emirates’ DP World (FRA: 3DW) at the Hong Kong High Court against China Merchants Port Holdings Company Ltd (HKEX 0144), accusing it of causing the Djibouti government to revoke the firm’s exclusive right to run the country’s ports.

Hong Kong-based China Merchants Port Holdings, a subsidiary of state enterprise China Merchants Group, deals mainly in the construction of ports, marine container logistics and operating container terminals.

It has actively participated in large-scale port infrastructure projects in multiple countries under China’s ambitious Belt and Road Initiative in recent years.

China Merchants Port Holdings controls the controversial 1,150-hectare Port of Hambantota, which Sri Lanka handed over to China on a 99-year lease.

Its inroads into Djibouti, located strategically between the Arabian Sea and the Mediterranean Sea, has for years been at the centre of legal disputes between the African nation and the UAE state enterprise.

In the writ of summons filed to the Hong Kong court in August last year, DP World accused the company for causing the Djibouti government to nationalise the Doraleh Container Terminal, despite the 30-year concession agreement that allowed DP World to exclusively run the terminal.

DP World, which operates 78 ports in 42 countries including Terminal 3 in Kwai Chung, Hong Kong, said under its agreement with the Djibouti government, it would have “full and exclusive right to establish, develop, and operate the Doraleh site”.

The concession agreement also said Djiboutian authorities cannot grant concessions for any other port capable of handling ocean-going vessels or free zone facilities within the country for the duration of the agreement.

The concession agreement took effect in February 2004 for a period of 30 years with the option for two 10-year renewals.

Joint-venture company Doraleh Container Terminal S.A. (DCT) was created to develop and operate the terminal.

The Djibouti government held 66.66 percent of DCT’s shares under state enterprise Port Autonome International de Djibouti (PAID), while DP World held 33.34 percent through its subsidiary Dubai (International) Djibouti FZE (DID).

Despite being a minority shareholder, DP World had the right to appoint most board members of DCT, thereby retaining control of the company's operations and management.

Two years later, both parties signed a 2006 Concession Agreement in which DID relinquished their role in the development of the Doraleh Container Terminal.

However, DID’s exclusivity right over other port and free zone projects remained in full force.

Economic hindrance

Doraleh Container Terminal commenced operations on February 2009 but the Djibouti government began expressing dissatisfaction with its agreement with DP World.

It said the concession agreement “gave a foreign company the opportunity to oppose the fundamental interests of the Republic of Djibouti by hindering its economic and social development process”.

Three years later in 2012, China Merchants Port Holdings began negotiating a partnership with Djiboutian authorities over the development of ports and free-trade zone projects in the nation. In July that year, they signed a strategic partnership agreement.

The Chinese firm is a direct competitor of DP World and was actively looking to invest in ports to strengthen its position in East Africa.

Djiboutian authorities sold 23.5 percent of its shares in DCT to China Merchants Port Holdings, effectively allowing the Chinese firm to hold 15.67 percent of the shares, contradicting the concession agreement, the legal filing said.

With China Merchants Port Holdings acquiring an indirect shareholding in DCT, Djibouti was bypassing its contractual obligations and implementing its partnership with the Chinese firm, the filing said.

In 2014, China Merchants Port Holdings and Djibouti decided to build Doraleh Multipurpose Port next to the Chinese People’s Liberation Army Support Base in Djibouti.

Chinese firms China Civil Engineering Construction Corporation Ltd and China State Construction Engineering Corporation began construction on the multipurpose port in the same year.

Operations at this port began in mid-2017, also in contradiction of the agreement between Djibouti and DP World, the UAE firm said.

At the multipurpose port’s launching ceremony, the Djibouti government signed a deal with China Merchants Port Holdings to build a new Doraleh International Container Terminal, to be located between the Doraleh Container Terminal and the multipurpose port.

New Shekou

According to the official Belt and Road Initiative website, the then Executive Director and Vice Chairman of China Merchants Port Holdings Hu Jianhua suggested plans to build a new port to Djibouti president Ismail Omar Guelleh in 2013.

Hu’s proposal was to build a new Shekou, part of the China (Guangdong) Pilot Free Trade Zone, complete with a new port, a free trade area and to transform an old port terminal into a business and residential centre.

The website said China Merchants Port Holdings invited Guelleh and other Djibouti stakeholders to inspect the “thriving” Shekou port. It said by learning about the history of Shekou, Djibouti will decide to cooperate with China Merchants.

According to DP World’s legal filing, Djibouti attempted to revoke DP World’s exclusive agreement by using allegations of corruption, while it developed its partnership with China Merchants Port Holdings on various projects.

In 2012, Djibouti sued Abdourahman Boreh, a former presidential confidante who was involved in the negotiation and execution of the agreement between DP World and Djibouti, for corruption at the High Court of England and Wales. The case was thrown out.

Djibouti again sued Boreh in 2017 at the London Court of International Arbitration for bribery and those charges were again dismissed. The court found no corruption was involved.

Nevertheless, Djiboutian authorities seized control of the Doraleh Container Terminal on February 22, 2018 and transferred concession staff and assets to Societe de Gestion du Terminal (SGTD), a public company created to manage the terminal.

“SGTD, whose sole shareholder is the State of Djibouti, has successfully taken over the operations of the Doraleh container terminal,” the Djibouti government had said in a press release, which highlighted the unfairness of its concession agreement with DP World.

“The implementation of this concession agreement was severely prejudicial to the fundamental interests of the Republic of Djibouti, to the development of the country and to the control of its most strategic infrastructure asset.”

DP World in February last year sued Djibouti at the London Court of International Arbitration over the takeover of the terminal.

Seven months later, the court ruled in favour of DP World and stated that its agreement with Djiboutian authorities is still valid and binding.

DP World, China Merchants Port Holdings and Djiboutian authorities did not respond to FactWire’s questions.

Strategic placement

An International Monetary Fund report said Djibouti’s external public debt to GDP ratio has already reached 85 percent.

At the end of 2016, 32 percent of this debt was owed by the central government. Sixty-eight percent consisted of government-guaranteed debt of public enterprises, 77 percent of which was owed to China’s EximBank, which is directly under China’s State Council.

In other words, the debt that Djibouti owes China is about 44 percent of its GDP.

Located on the Horn of Africa, Djibouti’s strategic location by the Bab-el-Mandeb Strait, which acts as a gateway between the Gulf of Aden and the Red Sea and the adjacent Suez Canal, makes it a desirable location for foreign military bases.

China’s first overseas military base was set up there in 2017.

The US established their base in Djibouti following the attacks on Sept 11, 2001.

It is also home to French and Japanese military bases.

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