US embassy cable - 04DJIBOUTI813

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 
------------------------------------ 
 
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