Logistics costs in emerging markets are often very high and in Africa they are usually crippling. The reasons are not complex. While corruption and poor productivity are significant, the dominant reason is the poor quality or even absence of transport infrastructure.
That’s why the building of the Djibouti to Addis Ababa Railway may be of significance. The Chinese state railway organisations have completed the building of an electrified rail link worth US$3.4bn between the Red Sea Port and the capital of Ethiopia, covering a distance of 750 km. The rail service will initially be focussed on cargo, particularly containerised traffic, however later development should see passenger services commence. The journey between Djibouti and Addis Ababa ought to take 12 hours.
The improvement of links to Djibouti is of particular importance to Ethiopia as it dominates the country’s trade with the rest of the world.
Ethiopia has experienced a period of dramatic economic growth over the past decade, average rates of 8 to 10%. Whilst much of this represents recovery in domestic demand, the country has recently become the target for investment in manufacturing, for example in the clothing sector which is exploring new sources of cheap labour. Cheap reliable logistics is vital to such operations. If Ethiopia is able to improve its transport sector it could provide the basis for continued economic growth driven by global trade.
As for the Chinese built railway, its ambition is to build further into Africa, possibly into the Sudan. This would provide the container terminals in Djibouti with a hinterland which may have the potential to develop and thus generate demand for container services. Yet political instability remains an issue. Certainly, building railways may be attractive to Chinese state-owned enterprises suffering from overcapacity, however it is possible that many of these projects depend on the willingness of the Chinese government to provide generous financing.
There may come a point when the Ethiopians may wish to diversify their transport options, particularly through the development of their road network. As ever though, it is funding which will be the key hurdle, although if it is cleared it would provide a significant catalyst for growth.
Look out for the publication of the Agility Emerging Markets Logistics Index 2017, due to be published later this month, for the logistics industry’s take on the prospects for logistics in global emerging markets. To receive a copy of the report upon publication please register your interest here.
Source: Transport Intelligence, January 17, 2017
Author: Thomas Cullen