Minya and Beni Suef are set to benefit from an expansion of Egypt's successful QIZ agreement
Political relations between Egypt and Israel have been a rollercoaster ride characterized more by downs than ups. It has been another story, though, for business ties between the two countries. One area in particular that has developed in a positive way is the Qualified Industrial Zones (QIZ) agreement. Last May, the agreement was expanded with the aim of fostering development in two of Egypt's governorates often sidelined from international initiatives: Minya and Beni Suef.
Created in 2005 as a US peace initiative, the QIZ agreement was highly controversial when it began. The uproar melted away swiftly though, and in its first year 471 companies signed on. Under the agreement, select Egyptian products benefit from duty-free access to the United States if 10.5% of their components are from Israel. Today more than 745 companies -- mostly apparel manufacturers, which enjoy a 29% tariff exemption on their products -- are registered QIZ exporters.
With the southern expansion coming into operation this month, the QIZ will reach some of Egypt's poorest governorates. Previously implemented in Greater Cairo, Alexandria, the Suez Canal region, and several Delta governorates -- areas with thriving textile industries -- the government is hoping to encourage investment in Upper Egypt, where jobs are limited and incomes are the lowest in the country.
In Upper Egypt, where agriculture is the dominant industry, some companies are beginning to process and add value to crops that were typically sent out raw. These companies stand to benefit significantly from the expansion of the QIZ.
One such company is eight-year-old Trinity Drying, based in the village of Maghagha in the Minya governorate. Drying vegetables such as onion, garlic, peppers and tomatoes, Trinity is an export-oriented company. According to factory manager Samir Hanna, low local demand for dried products and what he describes as a haphazard method of calculating sales tax led the company to focus on exports. Trinity shipped its 2008 production of 1,400 tons to markets in Europe including England, Spain, Sweden and the Netherlands. However, the company has struggled against low-priced Asian products.
"The tastes of our products are unique, but we are more expensive than Asian competitors," says Hanna. Who explains that Asian products can be more than EUR 200 per ton cheaper than the Egyptian equivalent.
The QIZ gives Egyptian vegetable manufacturers a strong incentive to shift focus to the US market. On some products, such as dried onion and garlic, companies receive a 29% tariff reduction if they include the 10.5% Israeli component. This component does not have to be in the main product, but may come in the form of plastic or paper packaging material or chemicals used in the cleaning or drying process.
More than just shifting export focus though, the QIZ agreement, which targets labor-intensive industries, is aimed at creating jobs.
"The process of cleaning vegetables is labor intensive," says Hanna. "I have 100 permanent workers in the cleaning phase and another 40 in the manufacturing." These workers require six months of training, during which time they receive salary and work full time in the factory. After that, each worker will have a job that pays an initial monthly salary of LE 360, increasing to LE 550 for experienced workers.
Dr. Ali Awni, head of the QIZ unit at the Ministry of Trade and Industry, says QIZ expansion creates jobs quickly. "An industry like apparel, for example, does not require a long training period. A few months of training and someone can find a meaningful job."
Awni expects local investors will be the first to take advantage of the QIZ expansion because they "know the landscape." Local companies that already operate factories in other governorates will likely take advantage of cheaper labor in Upper Egypt. Foreign investors will come later.
But QIZ investment is not as easy as building a factory. One thing Awni emphasizes is compliance. For manufacturers to receive tariff exemptions, they must show documents that prove their products are manufactured locally and contain Israeli content. Moreover, US custom officers do random annual audits on QIZ factories to make sure their output capacity matches the volume of products exported -- thus ensuring goods are actually manufactured in Egypt and do not simply pass through Egypt from other countries looking to take advantage of the QIZ tariff reduction.
Many companies are struggling to meet requirements of the QIZ. Out of 745 companies registered for the agreement to date, only 250 are actively exporting to the US. According to Awni, the other companies are simply not ready. Even of those exporting, 100 still fail to retain records and maintain adequate documentation, he says. Awni explains that his team of four is trying to educate these companies on how to improve their systems, but it is slow going.
On the other side Hanna is worried about strict regulations in the American market. He says that if a shipment has any defect, clients in the US will reject the whole container, whereas European clients tend to negotiate. "Mistakes are possible in any industry," says Hanna. Despite the tougher environment, Hanna believes the profit margins from the US market will make exporting worthwhile, and he is willing to take his chances once the QIZ expansion goes into action this August. "I can easily ship 1,000 tons of dried onion and garlic to the States," he asserts.
Egyptian manufacturers recognize the opportunity, wherever it originates, and many have jumped on board the QIZ expansion. Some, however, will find that their businesses need to modernize quickly to take advantage of the agreement. The government is unlikely to wait though, and is already setting its sights on bringing other Upper Egypt governorates, such as Sohag and Qena, into the QIZ fold.
By Ali El-Bahnasawy
© Business Today Egypt 2009
