Establishment of a Joint Free Industrial Zone at the Border Between Egypt and the Gaza Strip, Starting on the Egyptian Side of the Border

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Free Industrial Zone

The Free Industrial Zone consists of office space, fabrication plants, and warehouses located close to the Port Facility. The zone will be developed in a way that demonstrates environmental sustainability through the use of sustainable building technologies which would minimize the impact of the zone on the surrounding environment.

Key Features

1. Flexible bays of manufacturing, assembly and office space
2. Buildings respond to Sun through both active and passive building technologies
3. Road Systems
4. Water Channel- Passive environmental cooling system
5. Landscaped Corridors

 

Key Features

1. Secure Exterior Transition Spaces
2. Landscaped Corridors
3. Environmental Design Elements
   • Evaporative cooling Channel
   • Water Collection
   • Photovoltaic Arrays

 

Urban Fabric Study - Industrial Zone

This urban fabric study demonstrates planning principles that could serve as a guide for future development of the Free Indsustrial Zone. As the population increases, planned development would be of a higher density in order to incorporate desirable, culturally and environmentally sustainable housing and public spaces while still maintaining valuable and sensitive agricultural land. In order to accomplish this density, mixed use development would be used to maximize the available buildable space as well as to create a cohesive, integrated and vibrant urban fabric.

 

Key Features

1. Housing/Mixed Use
2. Assembly Plants
3. Commercial Space
4. Focused Landscaping Program
5. Sun Shading Devices

 

Climatic Responses

Planned architectural responces to environmental conditions are many. Various responces to climate influences include sunshading devices, photovoltaic arrays for hot water, orientation and window placement for ventilation.

 

Key Features

1. Photovoltaic Arrays
2. Manufacturing Plants
3. Focused Landscaping Program
4. Sun Shading Devices

a. General

The proposed Plan is based on providing long-term, sustainable, secure, desirable employment, and business opportunities for Palestinians, mainly from the Gaza Strip as well as for Egyptians residing in the northern Sinai, by establishing a joint “Free Industrial Zone” at the border between Egypt and the Gaza Strip, located initially mainly northeast of the site of the former Israeli town of Yamit. Later the zone would be expanded across the border into the Rafah District—and also later, in Phase Two, connected to a free seaport in Palestinian waters.

Phase One will require an agreement by the Egyptian government to lease land or otherwise transfer land to a joint free industrial zone authority and to permit it to operate outside Egypt’s customs and tax boundaries similar to the existing free trade zones in Egypt. It is expected to attract significant investments in productive assets such as factories, logistic centers, power and water treatment plants, communications facilities, assembly and warehousing centers, and financial service operation. Phase One envisions the initial use of Egyptian construction firms, employment of Egyptian police, border guards, and Egyptian and Palestinian administrators, managers, and engineers growing from a workforce of a few thousand to about 5000 over a five-year period. The remaining workforce of about 20-40,000 will be provided by day workers from Gaza so as to begin to provide meaningful employment for Palestinians. Investors will be attracted by

• low space rentals and/or costs
• abundant low or reasonable cost educated and skilled labor
• strategic site location
• easy and preferred access to European Union and U.S. markets
• effective and efficient transport links that will initially use Egyptian logistic and port infrastructure
• potential access to low cost material and energy sources

The total initial investment in preparing the “Free Industrial Zone” is estimated to be approximately $150-200 million (4-6km2) plus prepaid leasing costs. The industrial plants themselves are expected to be built and equipped by zone tenants that would be offered long-term 10-30 year leases of land and related infrastructure.

b. Security

Security is essential to attract investors. This is the main reason for locating the free industrial zone initially on the Egyptian side of the border. The simple fact is, as James Wolfensohn writes:

“investors cannot be expected to bring capital to an area in conflict.” Egypt has the resources to bring security to the border area and, as important, the apparent political will to do it. Establishment of a Free Industrial Zone could be done exclusively in Gaza, but it is highly unlikely to be successful; especially over the short and medium-term, when the need is so great.

Egypt’s presence on the border is a great regional asset for this and other reasons. All indications are that this fact is increasingly realized in Gaza by all parties, including various factions within the Palestinian Authority. As the project is implemented, the need for security guarantees is expected to become less of an issue and control of the project will shift increasingly to the Palestinians on their own.

c. Management

Similarly, Egyptian expertise in the establishment and operation of Free Trade Zones and industrial zones is a major asset for the region that this proposal is designed to take full advantage of. There are currently seven Free Trade Zones and forty industrial zones in Egypt. The Egyptian Government’s General Authority for Investment and Free Trade Zones (GAFI) is prepared to move quickly to get the proposed joint Free Industrial Zone up and running, should President Mubarak continue Egypt’s enlightened engagement to promote security and well-being in Gaza after Israel’s withdrawal.

Egypt’s expertise is especially critical given the Palestinians’ need for critical legal infrastructure and export-oriented business training, in particular—especially given the deep crisis today in the Palestinian economy and in relevant governing institutions. The Palestinians are not without experience in industrial zones, through their participation in the Israeli controlled Erez Industrial Zone and through private Palestinian management of the Gaza Industrial Estate (GIE) by the private holding company, Palestine Development and Investment, Ltd. (PADICO). However, both sites are essentially dependent on Israel, with foreign investors in the GIE in particular, such as American soft-drink manufacturers, locating plants there more for outside political reasons than for inside economic ones. Similarly, much progress has been made by the Palestinians over the past ten years with respect to the establishment of the necessary legal, judicial and regulatory system, but much more still needs to be done in this area—and “legal, judicial and regulatory reform has slowed considerably since 2002. In particular, there is an urgent need to effect meaningful “rule of law” in Gaza and the West Bank if private investors are to risk capital.

Governmental control of such sites, including development of proposed sites, within Gaza and the West Bank is exercised by the Palestinian Industrial Estates and Free Zones Authority (PIEFZA) which seems to have the experience and personnel to represent Palestinian interests increasingly well in the development and implementation of this project in its various phases.

In Egypt, a Public Free Zone is managed by a board of directors, which oversees either a public or private authority which administers the zone and also manages the contract with the main development company responsible for building the infrastructure. The trend in Egypt is toward increased private sector management of Free Zones. In particular, Law 83 of 2002 establishes Special Economic Zones (SEZ) which enjoy considerable autonomy and operate away from the bureaucracy although senior governmental officials still maintain final control. For example, the head of the Authority is appointed by the President. The Authority reports directly to the Prime Minister. Nine members of its 17-member board represent various ministries.

Egyptian laws and procedures for the establishment and operation of free zones would have to be modified to accommodate shared management with Palestinian Authorities. Nevertheless, the legal basis exists. (For more discussion, see section on Free Trade Zones below.)

d. Benefits for Egypt

There are important incentives for Egypt including economic development of the desolate northern Sinai.

Revenues to the Egyptian government and economy are estimated to grow from about $200 million/year-$1 billion/year in lease fees, income taxes, and various dues (as a Free Industrial Zone, no customs and corporate taxes would be collected). In addition there will be many spin-off or secondary benefits to both the local communities and population as well as to the Egyptian government and economy at large. It will increase government revenues, contribute to the economic development of the northern Sinai Peninsula, as well as provide a variety of other economic benefits for the country, particularly as most transactions such as worker pay and all kinds of services will all be in hard-to-get foreign currency. Egypt is currently going through its own economic crisis resulting from lack of tourism and low commodity prices for some of its important exports. Principal investors/operators in the Free Industrial Zone are expected to come primarily from OECD countries—albeit with significant Palestinian participation.

While Egypt’s per capita GDP of nearly $2600 is low by Middle Eastern standards, it is high by African standards (Sudan’s per capita GDP $860). But the economy urgently needs non-farm employment, with over 50% of the population dwelling in urban areas and urban unemployment over 30% total and 50% among the youth. Egypt urgently needs new economic activity, which will generate new jobs directly or indirectly. Such a development would also increase economic activities and opportunities in Egypt such as banking, insurance, education, and health care as well as increased use of Egyptian transport, port facilities, energy supply, and communications. As a result, Egypt should be able to reap significant economic benefits from this project. The proposal is also consistent with Egyptian efforts to encourage habitation outside of traditional population centers.

Other important incentives for Egypt—which we believe may outweigh the important economic benefits noted above--include: The important security benefit to Egypt of a stable, politically successful Gaza; and the overall benefits to Egypt of further demonstration of Egyptian leadership with respect to the Arab-Israeli conflict and with respect to ameliorating the plight of the Palestinian People, in particular.

e. Free Trade Zones

Free trade zones can be organized, owned, and operated in a variety of ways. Each has particular advantages and disadvantages.

In Egypt there are two general types of Free trade zones:

Public Free Zones

In Egypt, there are seven Public Free Zones provided with basic infrastructure and utilities. A Public Free Zone is managed by a board of directors, in addition to an administrative organ to provide technical, economic and legal advice and offer all needed facilities concerning establishment of projects and issuing the required licenses.

Land offered in exchange for rent is as follows:

• $3.5 per m2 annually for industrial projects
• $7.0 per m2 annually for other projects (storage & services)
• A reduction of 50% on these rates granted in special cases, as has been granted in the case of the Ismailia Public Free Zone Projects and could be granted for this project

Private Free Zones

The General Authority for Investment and Free Trade Zones (GAFI) issues a decree concerning the establishment of Private Free Zone each of which shall be limited to a single project if its nature so necessitates, according to the following criteria:

• Its site must enhance its economic status e.g., near raw material sources or establishment on a site appropriate with the nature of its activity (navigation & maritime transport projects, insurance companies, cement silos …etc).
• It should contribute to the establishment of new communities according to the current state policy.
• Unavailability of requested areas of land for the project in the public free zones.
• The project must observe all standards and regulations pertaining to the protection of the environment. In this case, the investor determines the site of the private free zone that either can be owned or rented. The authority shall help investors to obtain all necessary infrastructure and utilities needed.

Criteria for a Private Free Zone:

• Priority is given to export-oriented industrial projects
• Generating high value added to the domestic production factors
• Applying modern and advanced technology
• Creating more job opportunity

Projects Transformed to Private Free Zones

GAFI may approve changing the status of a project to a Private Free Zone in accordance with the following parameters:

• The project is successfully in operation
• The project is committed to export not less than 50% of the production
• Other specific requirements

The Free Industrial Zone being proposed here would likely start as a Public Free Zone and transition to a Private Free Zone in the future. Or, the proposed zone could be established as a Special Economic Zone (SEZ) under Law 83-2002.

Either model will give Egyptian and Palestinian government authorities a large degree of control—at least initially. The four SEZ projects currently underway in Toshka, the Gulf of Suez, East Port Said and Damietta, for example, have each started out with significant governmental participation. However, the long-term value added activities are to be 75-80% dominated by the private sector, according to the American Chamber of Commerce.

The model was notably used in China in the early years of its industrialization and move towards a market economy. It is also used on a smaller scale in various Middle Eastern countries as well as in Egypt.

Over the long-term it would be preferable for many reasons to shift to a Private Free Trade Zone. This would be the objective.

f. Planned Expansion into Rafah District

Will require Palestinian-Egyptian agreement on a single, unified legal framework, a unified incentive package or packages, a unified management team and a unified set of infrastructure services. In addition to the reasons already stated, the potential of such a joint, trans-boundary Free Industrial Zone is great. These include the advantages of common services, efficient trade and product development, and efficient connections to regional port and airport facilities.

A study of joint, or trans-boundary, free trade zones relevant to this project is forthcoming.

g. Infrastructure Improvements

Major upgrades would be made to existing infrastructure in Rafah, Khan Younis, and on the Egyptian side of the border proceeding hand-in-hand with construction of the free industrial zone; these, to include significantly raising transportation, road, power, sanitation and water treatment standards in the general area. Infrastructure improvements will also be required as development of the airport and proposed seaport goes forward—as well as the more immediate upgrading of existing facilities to house the training centers.

See Phase Four for discussion of the development of existing Israeli settlements in Gaza.

h. Export Gateways

Port Said: Initially, products of the free industrial zone would mainly be exported overland—or utilizing the proposed ‘‘Roll-On, Roll-Off’’ port facility--via Port Said. From here, one destination would be dedicated facilities in Genoa or other Southern European ports providing direct distribution to the European market. Another destination would be ports in the United States in accordance with duty-free, quota-free arrangements put in place following the Oslo Accords.

Gaza International Airport: As the situation warrants, exports would also be made from the Gaza International Airport, especially of perishable items. Obviously, even a partially operating airport –or heliport--would help investors and other interested parties participate in the free industrial zone. At a minimum, such partial schemes should be seriously considered for Phase One.

Gaza Seaport: As noted, construction of a temporary port facility is scheduled for the commencement of Phase Two in 2007—to be followed by a full-service deepwater free port. The World Bank estimates that building a limited ‘Roll-On, Roll-Off’ facility could be constructed in less than a year, for US $15-20 million—and that trip costs and delivery times appear more economic than the land route to Port Said. However, Israeli security concerns would appear to preclude an earlier start for Phase Two. It should also be noted that the Gaza Seaport envisioned in Phase Two, while significant for Gaza and the West Bank, should pose only minimal competition for the “mega project” underway for East Port Said. In contrast, the project is likely to bring more business to Port Said, since Port Said will remain an intermediate destination for some shipments.

i. Historical Note on Rafah as a Commercial Center:

“Rafah was an open commercial center linking the West Bank and Gaza Strip to Egypt and Sinai. This center was concentrated in the area adjacent to the border with Egypt, known as Poets’ Market. It has such a name because merchants coming from Egypt and Syria in old times used to gather in this market after finishing their jobs in order to exchange poems. Salaheddin Gate was the country’s gateway for merchants. In 1982, when Canada quarter was separated and Sinai turned back to Egypt, the economic status in Rafah was severely affected. About 155 commercial stores were closed down and Israel utilized the Erez entry point to introduce Israeli products to the area. This separation has affected the daily income of the people, forcing them to seek jobs in Israel. As a result of this situation, the commercial center moved from Rafah to the north of Gaza Strip, close to Erez, affecting the level of commercial projects in Rafah and causing a deterioration in people’s income.”