PLOTTING A FUTURE FOR THE ETHIOPIA-DJIBOUTI RAILWAY

UNCLAS SECTION 01 OF 02 DJIBOUTI 000813

SIPDIS

STATE FOR AF AND AF/E
STATE ALSO PASS USAID

E.O. 12958: N/A
TAGS: PREL PGOV ETRD ECON DJ ET
SUBJECT: PLOTTING A FUTURE FOR THE ETHIOPIA-DJIBOUTI RAILWAY


1. (U) Ahmed Dualeh, Regional and Commercial Director in
Djibouti of the Ethiopia-Djibouti Railway, told Ambassador
that the decision of Djibouti and Ethiopia to privatize the
railway linking their capitals is well underway. Following a
tender process to take place next year in 2005, the
international private sector is expected to assume full
control of the enterprise by 2006. Dualeh anticipates scant
participation by local investors in the privatization scheme,
citing a lack of capital, yet holds the view that the railway
will be attractive to investors because it can be profitable,
with adequate rehabilitation. An invitation for participation
in the railway concession envisions 51 per cent of ownership
of the railway passing to a single concession holder with
participation of the Governments of Ethiopia and Djibouti at
a minimum. The long-term value of the railway will be in the
ability of Djibouti to be attractive as a transshipment point
to other African destinations. End summary.

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Step One: End the Conflict
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2. (U) Ahmed Dualeh, Regional and Commercial Director in
Djibouti of the Ethiopia-Djibouti Railway, said the U.S., as
superpower, must work hard to end the Eritrea-Ethiopia
conflict as a first step in supporting privatization and
rehabilitation of the Ethiopia-Djibouti railway. Doing so
will minimize opportunities for disruption of the railway's
services once privatization is achieved. Seeing a link
between Ethiopian and Djiboutian economic development and the
success of the railway, he is also linking sustained economic
development with winning the global effort to confront
terrorism. "A hungry man," he said, "is easily influenced by
negative forces."

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Step Two: Seek Private Investors
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3. (U) At the inauguration in Djibouti on May 19 of
Ethiopia's new multi-million dollar embassy compound, guests
were provided a presentation from Swederail consortium
inviting private investment in the Ethiopia-Djibouti Railway
Company. The consortium pointed out up front the railway's
technical and physical constraints and its inadequacies in
organization and management. It cited these and a shortage
of funds for parts and maintenance as causes of the railway's
decline. The result has been, it stated, an excessive number
of locomotives and wagons out of commission and under repair,
high operational costs, a weak resource base, lack of an
improved system, and the inability of the railway to compete
with flexible trucking. The short-term challenge of the
railway company, according to the consortium's presentation,
is to find the necessary funding to catch up with the
maintenance backlog of the railway. The EU has approved 40
million euros (USD 48.2 million) to finance rehabilitation of
the line, which the consortium hopes will be a selling point
for potential shareholders.


4. (U) The deadline for submission of pre-qualification
proposals for shares of the Ethiopia-Djibouti railway
concession was set for May 31,2004. After May 31,
pre-qualified parties would be invited to submit their
technical proposals for evaluation. Tender documents would
be sent no later than June 30 with technical proposals
submitted by September 17. After that, parties with
satisfactory technical proposals would be invited to submit
financial proposals and the final negotiation and signing of
a concession agreement with the winner would take place by
June 2005. Management of the railroad under the concession
agreement would commence September 2005, with the major
shareholder given at least 51 per cent of shares. The
participation of the Ethiopian and Djiboutian governments
would be minimal, according to the consortium's presentation.
Issues of personnel and redundancy are among many other
issues that will need to be addressed as the process of
privatization moves forward.

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Step Three: Regain Lost Ground
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5. (U) France began construction of the Ethiopia-Djibouti
railway in 1897. It is one of the oldest in Africa and the
most direct link from the Red Sea to Addis Ababa. It is a
meter-gauged single-track line of 781 kilometers of which 681
kilometers are in Ethiopia. According to Dualeh, Dire Dawa
is the central station for operation of the line, hosts its
maintenance workshops and employs most of the railway's labor
force. In 1981, the French share in what ultimately became
the Ethiopia-Djibouti Railway Company, was taken over by
Djibouti, creating a 50-50 joint commercial venture between
Ethiopia and Djibouti. Headquarters are located in Ethiopia
and the Djibouti office is organized as a branch of the
headquarters office. Management of the railway, however, is
divided 50-50 between the two states, with chairmanship
rotating yearly between them. Current chair is Ethiopia, with
Djibouti's Minister of Transport assuming the honors in 2005.
The railway's General Manager is Ethiopian and its Deputy
Manager, who also resides in Addis Ababa, is Djiboutian.
Director of Finance of the railway, according to Dualeh, is
Ethiopian, as well as its Director of Human Resources. Both
are based in Addis Ababa. The Technical Director of the
railway is Djiboutian and he is based in Djibouti. The
railway's Transport and Commercial Directors are also
Djiboutian and are based in Djibouti.


6. (U) Over the years, Dualeh said, the railway company has
been caught up in the political and economic policies of
Ethiopia and Djibouti and has declined in influence. One
hundred kilometers of track are badly in need of repair. In
addition, the 1970s emphasis on the trade route by road from
Assab in Eritrea to Addis Ababa exacerbated the railway's
decline. Commercial travel by railway to Ethiopia from
Djibouti is currently less than 7 percent of total exports
from Djibouti to Ethiopia, according to Dualeh. He said the
railway is not currently in a position, because of its poor
condition -- including rolling stock and tracks -- to compete
with the road, yet it could enhance Djibouti's attractiveness
as a transshipment point to other African destinations. The
railway currently has 14 locomotives, 442 wagons and 27
passenger coaches. Not all are operational at this time.
The existing line capacity is about 6 trains per day per
direction and carries approximately 800,000 tons of goods per
year.

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Comment
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7. (U) Comment: At the same time that Djibouti is supporting
privatization of the railway, it is proceeding on other
fronts to secure commercial investments that would enable
Djibouti to become a vital transshipment point for other
parts of Africa. If projects such as an oil pipeline from
Djibouti's new port at Doraleh to Dire Dawa or Addis Ababa
are completed, or road improvements confirm trucking as the
preferred means of transport, the role of the railway could
remain marginal. The longer it takes to make the railway a
vital alternative to other means of transport, and the longer
the region remains unstable, the more difficult will be the
railway's path out of marginalization. This point is sure to
loom large with potential shareholders. End comment.
RAGSDALE