China Merchants Port Holdings Company Limited provides $150 million supplier's credit for Djibouti International Free Trade Zone (DIFTZ) Expansion Project (Linked to Project ID#85139, #97763)

On March 24, 2015, Hu Jianhua, General Manager of China Merchants Group (CMG), and the President of Djibouti signed a cooperation framework agreement for a free trade zone (FTZ). Then on January 18, 2016, CMG and the Djibouti Port and Free Trade Zone Authority (DPFZA) held a signing ceremony for a framework agreement for the Djibouti International Free Trade Zone (DIFTZ) Expansion Project. CMG then signed a project contract on January 15, 2017. Three days later, on January 18, 2017, Khor Ambado Free Zone Co. (FZCO or Djibouti Asset Company) — a special purpose vehicle and joint venture between Port of Dalian Authority Group (10% equity stake), China Merchants Shekou Industrial Zone Holdings (招商局蛇口工业区控股股份有限公司) (6% equity stake), China Merchants Investment Development Co., Ltd (CMID) (12% ownership stake), China Merchants Port Holdings Co., Ltd (12% ownership stake), and the Djibouti Ports & Free Zones Authority (DPFZA) (60% equity stake) — was established (legally incorporated) to develop commercial and infrastructure projects within the Djibouti International Free Trade Zone (DIFTZ). Then, on November 10, 2017, China Merchants Port Holdings Company Limited (CMP) issued a $150 million supplier’s credit (‘CMP Loan Facility’) agreement with Khor Ambado Free Zone Co. for the Djibouti International Free Trade Zone (DIFTZ) Expansion Project. The CMP loan, captured via Project ID#59393, carried the following borrowing terms: a 5% annual interest rate, a 1.25-year maturity (with the option to extend the maturity by 8.75 additional years), and no grace period. The Government of Djibouti — through the state-owned Djibouti Port and Free Trade Zone Authority (DPFZA) — issued a sovereign guarantee for repaying the supplier's credit. The loan was collateralized by a share pledge over 15.3% of the shares held by Great Horn Investment Holdings SAS (a subsidiary of DPFZA) in a China-Djibouti joint venture called Port De Djibouti S.A., which is co-owned the Government of Djibouti (76.5% equity stake) and China Merchants Port Holdings Company Ltd. (23.5% equity stake). Khor Ambado Free Zone Co. used the supplier's credit (loan) facility to on-lend to Port De Djibouti S.A. (PDSA). Then, in 2019, China Development Bank and Khor Ambado Free Zone Co. signed a $240 million loan agreement (ID#4430201901100002407) for the Djibouti International Free Trade Zone (DIFTZ) Expansion Project. The CDB loan, which is captured via Project ID#85139, carried the following borrowing terms: a 13 year maturity and a 3 year grace period. China Merchants Shekou Industrial Zone Holdings Co., Ltd. provided a loan guarantee worth $14.4 million (6% of $240 million CDB loan). The Government of Djibouti provided a sovereign guarantee for 60% of the face value of the loan ($144 million). The DIFTZ is a 40-hectare zone that consists of three functional blocks located close to all of Djibouti’s major ports. The purpose of the DIFTZ is to support industries such as the logistics, marine, construction, automotive, and home electrical industries. It is equipped with advanced facilities including high-speed telecommunications, power and water supplies, roads and parking lots. The pilot zone has four industrial clusters which focus on trade and logistics, export processing and business support: (1) Logistics Industry Cluster: transportation, bonded warehousing, logistics and distribution; (2) Business Industry Cluster: bulk bonded goods transactions, merchandise display, duty-free merchandise retail; (3) Business Support Cluster: financial services, information services, hotel dormitories, office buildings, training, intermediary services; and (4) Processing Manufacturing Cluster: packaging production, light processing of incoming materials, food processing, marine products, auto parts assembly. China Merchants Holdings (Djibouti) FZE (“CM Djibouti”) was the company responsible for project implementation. On January 16, 2017, Djiboutian President Guelleh and General Manager of China Merchants Group Hu Jianhua unveiled the launch area and laid a foundation stone for the DIFTZ expansion project. The first phase of the project, which involved upgrading and expanding the port facilities of DIFTZ, was officially opened on July 5, 2018. There are some indications that the $150 million CMP loan for the DIFTZ expansion project financially underperformed vis-a-vis the original expectations of the lender. In September 2018, the Government of Djibouti nationalized the Dolareh Container Terminal (DCT), an asset held by PDSA. The change in DCT ownership affected PDSA's expected profits because PDSA's profits included dividend receivables from DCT. As a result, the potential chargeable interest on the CMP loan facility, which would be determined in part by PDSA profits, was rendered invalid. The DCT nationalization also affected DPFZA's share pledge value. On November 9, 2018, CMP extended the loan's final maturity date by another 6 months (as captured via Project ID#97763).

Additional details

1. This project is also known as Phase 1 of the Djibouti International Free Trade Zone (DIFTZ) Project and Phase 1 of the DIFTZ at PK 23 Project. The Chinese project title is 吉布提国际自贸区于 or 布提自贸区建设项目. 2. The Djibouti Port and Free Trade Zone Authority (DPFZA) is the sole government authority in charge of the administration and the control of all the free zones and ports in Djibouti. 3. On March 28, 2019, Khor Ambado Free Zone Co. (FZCO or Djibouti Asset Company) — a special purpose vehicle and joint venture between Port of Dalian Authority Group (10% equity stake), China Merchants Shekou Industrial Zone Holdings (招商局蛇口工业区控股股份有限公司) (6% equity stake), China Merchants Investment Development Co., Ltd (CMID) (12% ownership stake), China Merchants Port Holdings Co., Ltd (12% ownership stake), and the Djibouti Ports & Free Zones Authority (DPFZA) (60% equity stake) — entered into a land lease agreement (the “Land Lease Agreement”) with China Merchants Holdings (Djibouti) FZE (“CM Djibouti”), a subsidiary of China Merchants Port Holdings Company Limited, pursuant to which the Djibouti Asset Company as lessor would sub-lease a parcel of land with an area of 137,801.63 square meters within the Djibouti International Free Trade Zone (the “Djibouti Lease Land”) to CM Djibouti as lessee, for a term commencing on the date of the Land Lease Agreement and ending on August 14, 2116. The Lease Land shall be used for the purposes of carrying out logistics, commerce and trade activities within the Djibouti International Free Trade Zone. CM Djibouti shall pay to the Djibouti Asset Company (i) an aggregate amount of $27,756,004.31 (equivalent to approximately HK$216,497,000) for the full term of the Lease, (ii) a deposit of US$200,000 (equivalent to approximately HK$1,560,000) in addition to the rent and (iii) property management fees at an annual rate of US$1.00 (equivalent to approximately HK$7.80) per square meter of the surface area of the Djibouti Lease Land. The Djibouti Asset Company is an associate of CMG, the ultimate holding company of China Merchants Port Holdings Company Limited. 4. Under the BRI banner, Chinese SOEs, especially China Merchants Group (CMG), have been attempting to replicate elements of its “port in front-(industrial) park in the middle-city behind” or Port-Park-City (PPC) model in Africa. The model is based on the Shekou Industrial Park in Shenzhen city in China’s Guangdong Province, established in 1979. It was the country’s first special economic zone, and it sparked Shenzhen’s growth as a commercial and industrial hub. CMG’s efforts to build the village of Shekou into a world-class industrial zone resulted in an area without basic infrastructure being transformed into a modern metropolitan center. The Shekou Model “entails developing adjacent industrial parks, commercial buildings, highways, free trade zones, residential areas, and power plants.” With the focus on the port, the model does not aim only to facilitate the transportation of goods but to “develop a larger, integrated system that helps sustain the port and is sustained by it in turn”. In 2017, Li Xiaopeng, president of CMG, mentioned that his company is using the Shekou Model as a template or a concept that can be applied and tweaked to adjust to its port projects worldwide. 5. For the time being, AidData has estimated the annual interest rate that applied to the November 2017 CMP facility (loan) as 5%. However, the interest rate was in fact to be determined by the highest of two rates: (1) a 5% per annum interest rate on the outstanding loan amount, or (2) 50% of the interest payable by PDSA to Khor Ambado Free Zone Company (FZCO) in the relevant year.

Number of official sources

22

Number of total sources

44