Open doors: Free zones offer a base to expand into regional markets

Efforts to shape the geography of Egypt’s economic development in the modern era date back to the 1970s, since which time it has adopted a number of zonal and incentive-based models. Some have proved more successful than others, but in their entirety they represent a crucial asset as the government turns its attention to reversing the decline in both domestic and foreign investment which has been the legacy of a year of political unrest in the country.

OFFSHORE AREAS: Egypt’s first free zones were established at the outset of President Anwar Sadat’s “Open Door” policy, which he enacted after the 1973 October War. As the nation began its transformation from a Soviet-influenced command economy to something more akin to a free market economy, Egypt’s new free zones represented a central pillar of the government’s strategy of increasing exports, attracting foreign investment and introducing advanced technology.

A total of nine free zones remain today, distributed at strategic locations such as Nasr City, on the outskirts of the capital, the port city of Alexandria, and adjacent to the Suez Canal cities of Port Said, Ismailia and Damietta. Legally defined as offshore areas, they are able to offer investors a number of incentives in return for an agreement that more than 50% of total production will be exported. These include a lifetime exemption from all taxes and Customs; the waiver of all import and export regulations; an option to direct a proportion of production to the domestic market provided Customs duties are paid; limited exemptions from labour provisions; and an exemption from Customs duty for all equipment, machinery and essential means of transport necessary for maintaining the licensed activities of a project. Industrial projects can take advantage of a rental rate of $3.50 per sq metre across all nine zones. All projects in Damietta and Shebein El Kom are also granted the $3.50 rate, while a $7 standard rate exists otherwise. Utility prices also come with a generous government subsidy. Electricity costs run to roughly $0.04 per KW (although a new pricing system for energy-intensive industrial sectors with the exception of food processing and textiles is currently being applied).

SPECIAL ECONOMIC ZONES: In 2002 the government introduced legislation that created a new breed of zone more in keeping with the liberalised economic agenda that was to characterise the rest of the decade. Rather than operate under a centralised regime, the new Special Economic Zones (SEZs) established by Law 83 of 2002 operate autonomously, with each having its own board of directors who oversee fundamental processes such as incorporation and licensing procedures. The flagship of this new initiative was the North West Suez SEZ, which stretches over 20 sq km of land located beside the Red Sea’s Sokhna Port.

Investors within the new SEZ regime enjoy a number of comparative advantages such as a 5% flat rate on personal income tax; integrated Custom and tax administration; an internal licensing facility and dispute settlement mechanism; and Egyptian certificates of origin for SEZ-based exporters, which allow them to take advantage of Egypt’s international trade deals.

This latter provision, in particular, has attracted investor interest from some of the world’s fastest-developing economies, keen to secure access to the EU market as well some of the buoyant economies in the Middle East and North Africa region. By far the most significant of these is the Tianjin Economic-Technological Development Area (TEDA), a Chinese operation specialising in the development of economic zones. In 2008 it formed a joint company with majority Egyptian interests to establish the Suez Economic and Trade Cooperation Zone in sector three of the North West Suez SEZ site. By 2011, over 30 companies from China and Egypt had been established in the new development, with around $180m of investment in place.

QUALIFIED INDUSTRIAL ZONES: In 2004 another variety of economic development zone was created with the inking of the Qualified Industrial Zone (QIZ) agreement with the US. Under this, Egyptian firms are able to gain preferential access to the US market as long as they comply with several rules related to the origin materials: a minimum of 10.5% of the 35% local content required to qualify for duty-free access to the US market must come from Israel – while Israeli firms are granted similar access according to the same ratio. By 2011, 19 QIZs had been established across four geographical areas: Greater Cairo, Middle Delta, Alexandria and the Suez Canal Zone. The 705 companies within them, the majority of which operate textile and garment projects, enjoy quota-free and open-ended access to one of Egypt’s largest trading partners.

INVESTMENT ZONE: Finally, in 2007 the government passed Law 19 of that year to create the investment zone (IZ) concept, a new model of development zone based on the principle of gathering projects within the same industry in one geographical area. As with SEZs, the legislation was formulated to allow the private sector to take the lead in developing, promoting and managing the facilities, but this time with the comparative advantage of homogeneity of activity in a single zone, and the cost and marketing advantages this entails. Companies operating within the new IZs have the advantage of being regulated under Investment Law No. 8, rather than the Corporate Law No. 159 which covers most commercial activity in the country. Known as the “favourable non-free zone regime”, its provisions allow for protection against expropriation and compulsory pricing; a full right of profit and dividend repatriation; a waiver from export requirements; access to dispute resolution committees administered by the General Authority for Investment; and unrestricted access to land in Upper Egypt. As of May 2011, some 13 IZs had been set up across eight governorates, encompassing economic activities as varied as textiles, building materials, engineering, nanotechnology and biotechnology, higher education and scientific research, and IT.

CHALLENGING TIMES: The events of 2011 have placed a question mark over the future of Egypt’s multitude of economic zones. The nation’s deteriorating fiscal position has compelled the government to re-examine the generous subsidy system which has provided cheap fuel and power for decades. First in line for subsidy cuts are energy-intensive industries.

Political unrest has also affected the development of Sino-Egyptian initiative at the Suez SEZ. In September 2010 the government agreed to sign a contract with TEDA which would allow it to develop a second phase of its Economic and Trade Cooperation Zone, but the change of administration stalled the completion of the deal. According to local media reports, six companies that had expressed an interest in establishing within the new development placed their plans on hold in the wake of the 2011 civil unrest. Reports of some of the smaller enterprises leaving the zone have been followed by news of new entrants, including a sizeable operation with an annual capacity of 80,000 tonnes of fibreglass. Better news came in March 2012 on the back of a visit to China by Egypt’s minister for foreign affairs, Mohamed Amr. After a meeting with China’s vice-president, Xi Jinping, a spokesman for the Ministry of Foreign Affairs told the press that the vice-president had stressed his nation’s continued support for Egypt, its wish to see a successful outcome to the SEZ project and its willingness to cooperate with Egypt in overcoming any obstacles which might hinder the project.

On the other side of the equation, Egypt still has much to offer investors who wish to use its economic zones to expand into international markets. However, an end to the political uncertainty and a return to social stability will be necessary in the short term if is to fully capitalise on the efforts it has made to date.

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The Report: Egypt 2012

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