02 Mar 2018

Djibouti and DP World – Only Mediation Can Really Solve What Is A Political Dispute

02 Mar 2018

By Peter Gray, Co-Managing Partner

That Djibouti have now acted suggests their belief that the sphere of influence in East Africa lies with China. It would be better for everyone if they did not test that belief.

Current news coverage of Djibouti’s termination of its DP World Concession focuses on whether it was “unlawful” or not. In my view, that misses the point. The dispute between the parties is now a political one, reflecting Djibouti’s perception of a change in the balance of power in the region, combined with its belief that its relationship with the UAE has broken down irretrievably.

Starting with the issue of legality, if Djibouti lost the initial arbitration, we can assume it will lose any subsequent arbitration also, whether or not the first award was open to challenge. Any repeat of allegations previously made (and I make no comment on them) will likely be held to be res judicata and will not be considered.

As a sovereign state, Djibouti cannot be prevented in practice from retaking control of a strategic asset, meaning that the question will be how much compensation it will be required to pay for what would be deemed an unlawful act – and whether it will pay that sum.

So far, so obvious. But, having international advisers, Djibouti can be presumed to have known all of this before it made its decision and calculated that, politically, it will prevail. It is clear that their relationship with the UAE was at a low ebb. They would have felt they had lost face as a result of the adverse publicity emanating from the arbitration and the Boreh litigation (critics will say that is not DP World’s fault, but that is not the point). Equally, DP World and the UAE may have seen the past allegations and the termination of the agreement as a potential loss of face on their part. Those based in the region know that “face” is as important in the Middle East and East Africa (to say nothing of more widely afield) as it is in Asia. Once the parties felt they may have lost face, only a skilled mediator was likely to resolve the matter. Formal dispute resolution – such as arbitration – allows only one party to be vindicated, meaning the loss of face with the other remains. That is inevitable in a regular commercial dispute, but has consequences when the parties are nation states.

Djibouti believe their concession agreement, signed in very different times, puts them at a disadvantage compared to the rest of the market. The High Court may have disagreed with that view, but I have seen a number of regional concession agreements – some in places far riskier commercially, politically and in terms of security – which were significantly more favourable to the host nation. Whether that means Djibouti are now entitled to a better deal is another question of course. It is all too common for regional governments to sign long term agreements without taking proper legal advice, only to find out later they have what they consider a very unfavourable deal. Some investors know this and take advantage of a government’s legal naivety, but in practice this only stores up trouble for later.

In practical terms, the dispute highlights the issues associated with long agreements. Concession agreements have to lengthy in order for the investor to recoup their capital, but if there is no flexibility, problems can arise later when the political and economic landscape has changed. Usually of course, the problems are dealt with by private negotiation between the parties. It may be that there is something to be learned from the oil and gas industry, which is far better at allowing flexibility in long term agreements as both oil prices and the economic and political health of the host nation wax and wane.

That Djibouti felt able to act reflects their perception of a change in regional strength. When the Concession Agreement was signed, the other players in the region were France and the US, each having a very significant military presence. Today, however, China is the big player. It has invested more than any other country, having built a large multi-purpose port next to the Doraleh terminal and built the Djibouti-Addis railway, which only recently opened. It also now has its own major military base in the country. If Djibouti has China onside, it may be unlikely that the older vested interests of the US or France (both very strong allies of the UAE) will intervene on behalf of DP World.

The UAE might seek to use economic sanctions, such as persuading shipping lines to move their business away from the terminal, the two obvious hurdles are a current lack of alternative routes into Ethiopia and Chinese control of some major shipping lines (who will wish to keep the Chinese port and railway connected).

The first hurdle is being remedied. It is unlikely to be a coincidence that the day before Djibouti acted, Sultan bin Suleiman met with the Somaliland president to discuss the development of the port there (see news report below – currently only in Somali). Developing Berbera makes sense in its own right, as Somaliland itself is developing fast and strategically, a country of the size of Ethiopia (over 110 million) needs more than one route to the sea. However, if Djibouti perceives Berbera as seeking to take advantage of the situation by taking trade that would otherwise come to them, that may cause issues of its own. One thing is clear – it is nobody’s interests for Djibouti, Somaliland and Somalia (a DP World subsidiary has a concession in Puntland, Somalia) to be at each other’s throats. There is room for them all to develop without one doing so at the cost of another.

Djibouti may also be calculating that the UAE’s principal regional ally, Saudi Arabia, will do little because it wants permission to have a base there from which to conduct its war in Yemen. Turkey is also a growing regional player, and will not be put off by this dispute. Indeed, it can be expected to reaffirm its interest in Djibouti as it vies with the UAE and Saudi Arabia for regional influence.

Those who would be concerned about the termination – western investors – would not seem to be a serious consideration. Their contribution is not seen as being of enough significance.

On the other hand DP World are right to be very upset. There is no doubt that they were the first major investor in the country in recent times and they turned the port into one of the busiest, safest and most efficient ports in the Africa. The UAE has made numerous other major investments in the country both a state and private level. Even if Djibouti thinks its calculations are right, the UAE will do all it can to make an example of the country. Indeed, it must do so in order to dissuade others from following suit in hope of getting a better deal, regardless of merit. One can expect the UAE to deny Djiboutians visas, which will in turn hurt the interests of ordinary citizens (who in turn may then pressurise their own government) given the importance of the UAE to African business generally. Some Djiboutian politicians carry French passports and so – ironically – may be unaffected unless they are named.

The UAE has a great deal to offer what remains a poor region – but one with great potential. Further, the African experience of Chinese investment has not always been a happy one. Chinese investors, being from state companies, tend to stick only to their mandate and not to mix with the locals. On the other hand, the UAE’s investment has encouraged numerous Emirati and other regional businessmen into the region. Their presence was a visible sign of real regional commercial cooperation. Unfortunately, others involved in the matter but outside the UAE and Djibouti appear to have a rather limited understanding of regional political complexities, which can only be gained by spending time in the region and meeting a wide spread of people. Hopefully, those advisors – whose influence can be seen on both sides – will remedy that.

Neither side will truly “win” this war of attrition. The solution is a mediated settlement. Given the level of rancour, it would require a highly skilled mediator, trusted and respected by both sides to resolve this matter. That mediator would have to account for the vested military and commercial interests involved as well as Djibouti’s internal politics, which is more complex than reported. This writer hopes that a mediator is found – and soon – so that the next news story from the Horn of Africa concerns a commercial success rather than yet another dispute.

 

Peter Gray is Co-Managing Partner of Al Dahbashi Gray.

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