Syria / Tunisia / Turkey - ANIMA Investment Network

transcript

Invest in the MEDA region, why, how ?

Algeria Egypt / Israel / Jordan / Lebanon / Libya / Morocco / Palestinian Authority/ Syria

/ Tunisia / Turkey

P A P E R S & S T U D I E S n ° 2 2 A p r i l 2 0 0 7

C o l l e c t i v e w o r k d r i v e n b y S o n i a B e s s a m r a a n d B é n é d i c t d e S a i n t - L a u r e n t

Invest in the MEDA region, why how ?

References This document has been produced within the context of a mission entrusted by the European Commission to the Invest in France Agency (AFII), assisted by the Istituto Nazionale per il Commercio Estero, ICE (Italy) and the Direction des Investissements, DI (Morocco), to develop a Euro‐Mediterranean Network of Mediterranean Investment Promotion Agencies (« ANIMA»). The n°of the contract is: ME8/B7‐4100/IB/99/0304.

ISBN: 2‐915719‐28‐4 EAN 9782915719284

Authors This work is the second edition of a synopsis guide realised with contributions from various experts working under the ANIMA programme, especially for the writing of the project web site pages.

The following authors have participated in the two editions:

In 2006, Sonia Bessamra (free‐lance consultant) and Bénédict de Saint‐Laurent (AFII) have fully updated the content, assisted by Pierre Henry, Amar Kaddouri, Emmanuel Noutary and Elsa Vachez (ANIMA team, translation, revisions);

The former 2004 edition, which provides the guide frame, was directed by Bénédict de Saint‐Laurent (ANIMA, co‐ordination, synopsis, rewriting, data), Stéphane Jaffrin (ANIMA, on line implementation, some updates) and Christian Apothéloz (free‐lance consultant, co‐ordination), assisted by Alexandre Arditti, Delphine Bréant, Jean‐François Eyraud, Jean‐Louis Marcos, Laurent Mauron, Stéphanie Paicheler, Samar Smati, Nicolas Sridi et Jihad Yazigi (various thematic or country articles).

The country pages have been read and amended by the investment promotion agencies of MEDA countries. ANIMA declines any responsibility on possible errors or inaccuracies.

Contents Recent change in MEDA countries’ economic situation................. 10

Overview.............................................................................................. 10 An appreciable growth.............................................................................. 10 Capital flows increase significantly......................................................... 13 Reforms and privatisation breakthrough ............................................... 15 Foreign investment growth ...................................................................... 16

Mid‐term macroeconomic review per country............................... 19 The Euro‐Mediterranean partnership and the new neighbourhood policy ........................................................................... 24

The Euro‐Mediterranean partnership and the MEDA programme .......................................................................................... 24 The MEDA and FEMIP financial instruments and the institutional twinning......................................................................... 28 The South‐South co‐operation........................................................... 33

Business opportunities in MEDA countries...................................... 36 Algeria .................................................................................................. 36

Overview..................................................................................................... 36 The National Investment Development Agency (ANDI) ..................... 42 How to invest in Algeria........................................................................... 44 Finance & banking in Algeria................................................................... 48 Telecommunications & internet in Algeria............................................. 49 Business opportunities in Algeria............................................................ 51 Success Story: Orascom, 10 million subscribers in Algeria .................. 67

Egypt..................................................................................................... 69 Overview..................................................................................................... 69 How to invest in Egypt?............................................................................ 78 Finance & banking in Egypt ..................................................................... 81 Telecommunications & internet in Egypt ............................................... 83 Business and investment opportunities in Egypt .................................. 87

Success Story: The Dutch Heineken company brews 100 million litres of malted drinks every year ............................................................ 97

Israel...................................................................................................... 99 Overview..................................................................................................... 99 Israel’s Investment Promotion Centre (IPC) ........................................ 103 How to invest in Israel ............................................................................ 104 Finance & banking in Israel .................................................................... 106 Telecommunications & internet in Israel .............................................. 108 Business and investment opportunities in Israel ................................. 110 Success story: global high tech alliance Tel Aviv ‐ Grenoble ............. 124

Jordan ................................................................................................. 126 General overview..................................................................................... 126 The Jordan Investment Board (JIB)........................................................ 132 How to invest in Jordan? ........................................................................ 134 Finance & banking in Jordan .................................................................. 137 Telecom & internet in Jordan ................................................................. 138 Business and investment opportunities in Jordan............................... 141 Success story: Land Rover makes a strategic all‐weather investment................................................................................................. 151

Lebanon.............................................................................................. 153 Overview................................................................................................... 153 The Investment Development Authority for Lebanon (IDAL).......... 162 How to invest in Lebanon....................................................................... 163 Finance & banking in Lebanon............................................................... 170 Telecom & internet in Lebanon.............................................................. 172 Business and investment opportunities in Lebanon ........................... 173 Success story: Ipsos polls the Middle East from Beirut ...................... 178

Libya ................................................................................................... 180 Overview................................................................................................... 180 How to invest in Libya? .......................................................................... 188 The Libyan Foreign Investment Board (LFIB)...................................... 196 Financial & banking sector in Libya ...................................................... 198

Telecommunication & Internet in Libya ............................................... 200 Business and Investment Opportunities in Libya ............................... 203

Morocco.............................................................................................. 221 Overview................................................................................................... 221 The Department of Investments (DI)..................................................... 227 How to invest in Morocco....................................................................... 229 Finance & banking in Morocco .............................................................. 233 Telecom & internet in Morocco.............................................................. 236 Business and investment opportunities in Morocco ........................... 238 Success story: Telefonica invades the Moroccan telecom market ..... 254

Palestinian Authority (West Bank and Gaza) ............................... 256 Overview................................................................................................... 256 Palestine Investment Promotion Agency (PIPA)................................. 262 How to invest in the Palestinian Territories......................................... 264 Finance & banking in Palestine .............................................................. 266 Telecommunications & internet in Palestine........................................ 267 Business and investment opportunities in Palestine........................... 269 Success story: Watanyia Telecom believes in the power of communication......................................................................................... 283

Syria .................................................................................................... 284 Overview................................................................................................... 284 A Syrian Investment Promotion Agency to be set up soon................ 289 How to invest in Syria............................................................................. 289 Finance & banking in Syria..................................................................... 292 Telecom & internet in Syria .................................................................... 295 Business opportunities in Syria.............................................................. 296 Success story: the Spanish company Aceites del Sur has faith in the Syrian olive oil ................................................................................... 299

Tunisia ................................................................................................ 301 Overview................................................................................................... 301 The Foreign Investment Promotion Agency (FIPA)............................ 310 How to invest in Tunisia......................................................................... 310

Finance & banking in Tunisia................................................................. 313 Telecom & internet in Tunisia ................................................................ 315 Business & investment opportunities in Tunisia ................................. 317 Tunisia: The Spanish group Uniland invests in the Enfidha cement plants............................................................................................ 324

Turkey................................................................................................. 326 Overview................................................................................................... 326 The Directorate General for Foreign Investments (GDFI) .................. 334 How to invest in Turkey ......................................................................... 336 Finance & banking in Turkey ................................................................. 339 Telecommunications & internet in Turkey........................................... 343 Business opportunities in Turkey .......................................................... 345 Success story: Schneider has created a network of 100 partners and exports out of Turkey....................................................................... 366

Acronyms AA: Association Agreement CSP: Country Strategy Paper EC: European Commission EIB: European Investment Bank EU: European Union FTA: Free Trade Area GDP: Gross Domestic Product IMF: International Monetary Fund IPA: Investment Promotion Agency MEDA: Mediterranean Partner Countries MENA: Region of the Middle‐East and North Africa (Middle East and

North Africa) = MEDA + Gulf countries + Iran and Irak MEPP: Middle East Peace Process MIGA: Multilateral investment guarantee agency (World Bank group) MDG: Millenium Development Goals MIPO: Mediterranean Investment Project Observatory (ANIMA) NGO: Non Governmental Organisation NIP: National Indicative Programme OECD: Organisation for Economic Co‐operation and Development PIM: Program of Industrial Modernisation RSP: Regional Strategy Paper SME: Small and Medium‐sised Enterprise UNCTAD: United Nations Conference on Trade and Development UNDP: United Nations for Development Programme US$: United States Dollar WB: The World Bank WTO: World Trade Organisation

Recent change in MEDA countries’ economic situation

Overview Currently an observer in the Euro‐Mediterranean partnership, Libya, which could play an important part in this partnership in the medium term, was included among the MEDA set in this 2007 edition.

An appreciable growth In 2005, the total population of the Mediterranean partner countries (or MEDA countries) was estimated at 265 million inhabitants and the regional GDP amounted to US$ 864 billion (including Libya and excluding the Palestinian Authority). The MEDA GDP should overpass US$ 1,000 bn for the first time in 2007 (for comparison purpose, it reached US$2,200 bn in China in 2005).

Gross national income per capita expressed in purchasing power parity (ppp.) was however very disparate, ranging from US$ 3,847 in Syria to US$ 23,416 for Israel.

Macroeconomic stability and a sustained pace concerning economic reforms allowed per capita income levels in the MEDA countries to rise substantially. Above all, the main source of these achievements is to be found in the crescent openness of the region and, in particular, in its increased economic integration vis‐à‐vis the European Union. The association agreements concluded between the MEDA countries and the EU came into effect in all those countries except for Syria (and of course Libya).

Economic overview

.Figure 1. Change in GDP of MEDA countries (US$ billion, current prices). Source WDI 2006

0 100 200 300 400

Algeria

Israel

Jordan

Lebanon

Morocco2

Tunisia

Turkey

2003 2005 2007

Growth in MEDA countries has been following, over the past few years, an ascending curve and this upward trend was confirmed in 2005 and 2006, with notable exceptions for Lebanon, Palestinian Territories and, to a lesser extent, Syria (2.9% in 2006 after 3.8% in 2005). The other countries enjoyed an average growth rate close to 5%, based on a favourable global environment, with flourishing energy markets, a new dynamism regarding tourism, an increase in FDI and emigrants’ remittances:

In Algeria, the marked recovery of the energy sector reflected on the economic growth and the growth rate reached 5.1% in 2005 and 4.4% (average of various estimates) in 2006.

In Egypt, growth is accelerating (4.8% in 2005, average of 6.2% in 2006).

In Israel, GDP growth rate improved in 2006 at 6.2% after a good 2005 score around 5.2%.

Thanks to foreign investments and migrants’ remittances, Jordan kept a relatively high growth rate (7.2% in 2005, 4.6% in 2006) in a troubled environment.

The growth of Lebanon remained volatile (4,9% in 2003, 6,3% in 2004, between 0 and 1% in 2005, negative in 2006) and principally fuelled by private consumption figures which exceeded interior production, thanks to massive transfers by the Diaspora.

Figures regarding Libyan growth rate are controversial. According to the World Bank, the country’s economy grew modestly in 2005 (3.5%); compared to 4.8% in 2004. The estimates for 2006 indicate that 2006 will be clearly better.

The victim of a bad performance of the agricultural sector ‐the added value falling by 12 to 15%‐ and of a sharp increase in the energy bill, Morocco ranked poorly in 2005 (1.8%, but 4,6% without agriculture), but recovered a high rate (6.7%) in 2006.

Tunisia performed fairly well in 2005 (4.2%) and 2006 (average of 4.5%).

Turkey’s real GDP increased by 5.2% in 2006, after robust rates in 2005 (7.4%) and 2004 (8.9%).

As regards the Palestinian Authority, the ongoing political and economic crisis makes its macroeconomic situation difficult to comment on.

Economic overview

Figure 2. Growth in MEDA countries in 2005 (source: World Development Indicators, World Bank)

1.0%1.8%

3.5% 3.8%4.8% 5.1% 5.2%

7.2% 7.4%

Lebanon

Morocco

Tunisia

Algeria

Israel

Jordan

Turkey

Figure 3. Real growth rate of 2006 GDP (civil year estimates)

Country CIA World Fact Book Economist Intelligence Unit Algeria 5.6% 3.1% Egypt 5.7% 6.8% Israel1 4.8% 4.8% Jordan 4.6% 4.6% Lebanon ‐5.0% ‐7.8% Libya 8.1% 8.1% Morocco2 6.7% 6.7% Palestinian Authority3 n.a. ‐18.5% Syria 2.9% 2.9% Tunisia 4.0% 5.1% Turkey 5.2% 5.2%

1. According to Israelʹs Central Bureau of Statistics: 5% 2. According to Bank Al‐Maghrib (Banque Centrale du Maroc): 7.3% 3. Controversial figures for obvious reasons

Capital flows increase significantly Although capital outflows remain substantial (according to the IE‐Med, placements abroad coming from the central Maghreb are estimated to around US$ 8 billion per year, with an accumulated stock over US$ 100 billion; dividends repatriated by the foreign

firms represented about US$ 1.5 billion in Tunisia only for instance), capital inflows of different sort have been continuously increasing over the past years. This is thanks to foreign direct investment ‐up to nearly US$ 30 billion in 2005 from less than 10 billion in 2002 according to UNCTAD data‐, receipts from tourism, which more than doubled in ten years, up to US$ 28 billion in 2004, from US$ 12.5 bn in 1995‐ and emigrant remittances (close to US$ 20 bn in 2004). In the MEDA region, made of intermediate‐income countries, public aid tends to diminish (Figure 4).

Figure 4. Order of magnitude of capital inflows into the MEDA region

in million USS

Foreign direct investment

Tourism revenues

Emigrants’ remittances

Public development aid

Total *

Year 2005 2004 200 4 2004 Source UNCTAD OMT World Bank World Bank

Algeria 1 081 105 2 460 313 3 959 Egypt 5 376 4 924 3 341 1 458 11 758 Israel 5 587 1 918 398 479 8 382 Jordan 1 532 664 2 288 581 5 065 Lebanon 2 573 1 027 5 723 265 9 588 Morocco 2 933 3 152 4 221 706 11 012 Palest. A. ‐ ‐ 692 1 136 1 828 Syria 500 1 785 855 110 3 250 Tunisia 782 1 536 804 328 3 450 Turkey 9 681 12 773 692 257 23 403 MEDA‐10 30 045 27 884 18 133 5 633 81 694 % 37% 34% 22% 7% 100%

* Total to be considered with caution, since data relate to different years (latest figures obtained by ANIMA). The receipts of privatisation are included in FDI.

Oil and gas producers such as Libya and Algeria, and to a lesser extent Egypt or Tunisia (gas), improved their incomes thanks to the worldwide surge in energy prices (oil barrel jumping from US$ 39 in 2004 up to 70 dollars in 2006. The cautious management of oil revenues made it possible to reduce the public debt ratios while raising foreign exchange reserves. On the contrary, non‐oil producing countries suffered from oil price increase and could only

Economic overview

mitigate this thanks to the incomes drawn from financial transfers‐ remittances, tourism and capital inflows originated, among other sources, in the roaring Gulf economies:

According to the latest World Bank report, Lebanon is the largest recipient of worker remittances among the Arab countries with an estimated 2006 amount of US$5.2 billion, followed by Morocco (US$5.1 billion), Egypt (US$3.3 billion) and Jordan (US$2.8 billion). For most specialists, the non‐recorded transfers would double these amounts.

The amount of petrodollars available for investments abroad was estimated at US$ 620 billion by the IMF in 2006, of which a growing part is injected into the MEDA region.

Reforms and privatisation breakthrough Structural reforms aimed at improving the general business and investment environment are being implemented in most MEDA countries.

Several countries of the region fostered budgetary reforms: e. g. Algeria which improved its budgetary transparency and created reserve funds fed by oil revenues.

In Jordan, the budgetary measures passed by the government in order to increase fiscal incomes and to curb public spending improved notably the state of public finances.

Morocco started restructuring its specialised public banks and developed a strategy aiming at reducing its structural budget deficit in co‐operation with the World Bank and the IMF.

Egypt launched a thorough tax and customs reform along with a structural adjustment programme.

Algeria recently took measures to strengthen the systems of payment and improve the financial regulation system as well

as enforce the stricter prudence norms. Khalifa Bank, the Commercial and Industrial Bank of Algeria (BCIA) and two other private banks saw their licences cancelled. The State announced the privatisation of many public banks for the benefit of future strategic foreign investors.

The impact of privatisations in the region is mixed. Many profitable privatisations have been carried out, or are in progress (banks, mobile telephone, container ports, air transport etc.). Even if good opportunities remain available, the countries must now address the more difficult sectors (“social” services such as water, passenger transport, privatisation of industrial companies). Some programmes are sleeping, while others provide positive results, in particular in Morocco, in Jordan, in Tunisia and Turkey (significant mobile phone operations in 2005).

In many of the MEDA countries, private initiative is more encouraged than ever through various public incentives, foreign firms see their access to local markets greatly broadened, while the paperwork to start a local business is being constantly reduced.

In Algeria, the new energy sector law, which aims at opening it to private investors, offers promising prospects. In the same way, in Morocco, the labour market reforms, the rationalisation of the investment regulations and the implementation of judiciary reforms are to be considered as bold steps, representative of a more general business‐friendly movement in the whole region. Tariff dismantling and the abolition of administrative import licences are under scrutiny or being implemented in a majority of the countries concerned by the agreements of association with the EU.

Foreign investment growth Though the will of governments to stick to reforms ‐designed to address the deep causes of regional underperformance‐ remain

Economic overview

variable, the measures already passed greatly contributed to change foreign investor perceptions and decisions regarding Euro‐Mediterranean business opportunities.

Figure 5. Change in FDI inflows into the MEDA region (in million US$, UNCTAD for 1997‐2005 & various sources for 2006) FDI flows 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Algeria 260 501 507 438 1 196 1 065 634 882 1 081 3 0001

Cyprus 491 264 685 804 652 297 891 1 079 1 166 n. aEgypt 887 1 065 2 919 1 235 510 647 237 2 157 5 376 5 3002

Israel 1 628 1 760 2 889 4 392 3 044 1 648 3 745 1 619 5 587 132003

Jordan 361 310 158 787 100 56 436 651 1 532 1 5004

Lebanon 150 200 250 298 249 257 2 860 1 899 2 573 1 0001

Malta 81 267 822 652 314 ‐375 958 309 562 n. aMorocco 1 188 417 1 376 423 2 808 428 2 429 1 070 2 933 2 3002

Palestine A. 149 58 19 76 51 41 n. a. 3 n. a. n. a. Syria 80 82 263 270 205 225 180 275 500 2 0001

Tunisia 365 668 368 779 486 821 584 639 782 3 3125

Turkey 805 940 783 982 3 266 1 037 1 752 2 837 9 681 17 1002

Total MEDA‐12

6 445 6 532 11 039 11 136 12 881 6 147 14 706 13 420 31 773 48 712

MEDA‐10 5 873 6 001 9 532 9 680 11 915 6 225 12 857 12 032 30 045 48 712MEDA‐9 excl. Israel 4 245 4 241 6 643 5 288 8 871 4 577 9 112 10 413 24 458 35 512

1 ANIMA estimates according to the extrapolated official data 2 UNCTAD estimates published on January 10, 2007 3 Israel Trade figures published in January 2007 4 EDC Estimate 5 Figure from Banque Centrale de Tunisie

Since 2001, the region has been attracting increasing inflows of private capital through M&As, bonds and foreign direct investments (Figure 5). The determinants of FDI in the MEDA region are both resource‐seeking and market‐seeking: growing demand, demography, competitive production costs and access to the EU /US markets through many free trade agreements.

Services (banks, telecoms, offshoring, and tourism) and real estate are booming. Major infrastructure projects are offered to interested global companies. Close to EU, the MEDA region also serves more and more as a re‐export platform, finding its specific function in the global economic integration process of industrial supply chains (e g. automotive or aeronautical contractors in North Africa and Turkey, technology‐driven acquisitions in Israel).

In Egypt, new records were set in 2005 and 2006 regarding FDI amounts (more than US$ 5 billion each year, against an average of 1.2 billion per annum between 1997 and 2004). The portfolio is mainly composed of heavy industry (energy, chemistry, fertilizers), construction (real estate, tourism) and acquisition of bank networks.

The volume of the FDI into Turkey has surged in recent years. The country has attracted US$ 17 billion in 2006 (estimates), vs. US$ 9.7 bn in 2005, US$ 2.8 bn in 2004 and an average of US$ 1.3 bn per annum between 1997 and 2003. The country counted 11,685 foreign companies in January 2006, of which 2,825 created in 2005.

Foreign investments in Israel were supported by many M&As, in particular in technologies. FDI inflows reached US$ 5.6 billion in 2005 (UNCTAD). In 2006, this amount rose to US$ 13.2 billion according to Israel Trade.

In Jordan, foreign investment demonstrated a significant recovery, reaching or exceeding the US$ 1.5 billion threshold in 2005 and 2006 (vs. an average of 357 million only between 1997 and 2004). The operations are mainly portfolio investments and real estate projects.

After the major deals of previous years (acquisition of Maroc Telecom by Vivendi), FDI stagnated somehow in Morocco in 2006 (US$ 2.3 billion vs. 2.9 in 2005; the 1997‐2004 average was US$ 1.27 bn). However, the announced projects (MIPO‐ANIMA

Economic overview

observatory), in particular in the real estate and tourism fields, reached an impressive amount in 2006 (5.3 billion).

In Tunisia, privatisations, in particular in the telecoms sector, boosted 2006 FDI (US$ 3,312 bn), exceeding for the first time in history the threshold of one billion US$, vs. an average of 610 million only between 1997 and 2005. At the beginning of 2006, the sale of 35% of the capital of Tunisia Telecom to TeCom DIG (Dubai) generated DT 3.052 billion of receipts (US$2.3 billion), exceeding the sum of privatisation receipts since 1987.

In Lebanon, foreign investments were on a very promising trend (US$ 2.5 billion in 2005, with many Gulf investors coming back), but the attacks against political leaders and journalists, the 2006 Summer conflict with Israel and the crisis which followed have affected confidence. The majority of the FDI is directed towards banking activities, real estate and tourism.

Syria seems to open up to globalisation and is said to have recorded approximately 2 billion dollars in FDI during 2006 (majority of projects coming from the Gulf), vs. 500 million in 2005 and much lower flows before (average of 200 million only between 1997 and 2004). Domestic investments also increased a lot (6.3 billion dollars vs. 3.7 billion in 2004).

Finally, the Palestinian territories continue to suffer from the interminable crisis affecting their economy and attractiveness, in spite of undeniable human assets. ANIMA however detected in 2006 a €289 million FDI project (mobile phone licence for the Kuwaiti group Watanya).

Mid-term macroeconomic review per country Structural reforms carried out in Algeria produced their effects,

facilitating the return to sound macroeconomic equilibrium, improved GDP growth and the development of a more

dynamic private sector, involving a greater inflow of foreign direct investments. GDP real growth rate passed from 4.1% in 2002 to 6.8% in 2003 and eventually stabilised around 5% since then (5.2% in 2004, 5.4% in 2005 and 4.4% in 2006), thanks to rising hydrocarbons production levels and prices. This reinforced the already appreciable surpluses of the current‐account balance (the hydrocarbons –based external income represented 97% of the export earnings from final goods and services). Multiannual projections revealed by the 2005 budget counted on an average rate of 5.3% a year over the period 2005‐2009. The expansionist budget policy implemented since 2001 achieved some results: this sustained public spending guaranteed a certain demand at the benefit of non‐energy sectors. The added value in services increased by more than 60% in 5 years, while the building and public works sector recorded a 40% growth in added value. Inflation dropped to 1.6% in 2005 vs. 2.7% in 2004, following the fall in foodstuffs prices. The foreign‐exchange reserves exceeded the forecasts, reaching US$ 56.2 billion at the end of 2005 (equivalent of 22 months of imports of goods and services). Finally, external public debt has been entirely paid by anticipation, while another part of the oil and gas revenues is being saved for future generations through the constitution of reserve funds.

In Egypt, the new team resulting from the cabinet reshuffle of July 2004 endeavoured to take new steps regarding commercial and financial liberalisation as well as the program of economic and structural reforms. Between 2000 and 2003, the country recorded an average growth rate of 3.5%, affected by exogenous shocks such as the 9/11 events and the war in Iraq. However, benefiting from the worldwide recovery and the depreciation of the national currency, GDP real growth rates passed from 4.1% in 2004 to 4.5% in 2005 and 6.2% in 2006. This upward trend is fuelled by tourism (US$ 6.4 billion in 2004‐

Economic overview

2005), the migrant workers’ remittances (US$ 4.3 billion), the Suez Canal revenues (US$ 3.3 billion) and oil exports (US$ 1.2 billion).

In Israel, whereas growth rates had fallen to ‐0.9% in 2002 and 1.5% in 2003 (a 2001‐2003 average of 1.3%) because of the strong crisis related to the second Intifada in the Palestinian territories and the worldwide bursting of the technological bubble in 2000, a significant recovery started with GDP growth rates of 4.8%, 5.2% and 4.8% respectively in 2004, 2005 and 2006. The major sources of this growth were exports (+15%), private consumption, as well as the rapid expansion of the advanced technology industries – where the Israeli economy finds its strength‐ and of tourism.

Jordan was the most exposed country to the collateral damages of the war in Iraq, which represented its main export market. After a spectacular real GDP growth rate of 7.7% in 2004 up from 4.1% in 2003, the economic situation worsened in 2005 because of the increase in the prices of imported hydrocarbons and an unexpected fall of the international aid, which represented approximately US$ 700 million in 2005, compared to 1.3 billion in 2004. Moreover, tensions in the region contributed to the deterioration of the tourism incomes. Fortunately, they did not cause any significant loss of attractiveness for foreign investors. Growth in 2005 remained strong therefore, close to 7.2%, with 2006 estimates at 4.6%.

Lebanon enjoyed a sustained growth rate between 1992 and 1997, close to an average 6 to 7%, based on the rebuilding of the country after 15 years of civil war and on the performances of the financial sector. However, public debt had been constantly increasing meanwhile. The Paris II and III conferences in 2002 and 2007 showed a strong mobilisation of the international community in an attempt to alleviate the burden. The 2005

attacks against politicians and the 2006 conflict with Israel blew out this fragile recovery and dragged the country back into troubles. At the end of 2006, official figures revealed a public debt over GDP ratio above 200%. Real GDP was expected to contract by approximately 7% in 2006. A strong recovery is expected in 2007, provided that the current political uncertainty does not affect too severely the macroeconomic environment.

The lifting of the UN sanctions which had struck Libya since 1992 and the lifting of the subsequent embargo greatly contributed to bring the country’s international economic and financial relations with the rest of the world closer to normality. Libyan economic achievements are impressive, due to the increase of oil production, the resumption of oil exports and the rise in oil barrel prices since 2003. This favourable international economic situation made it possible for the GDP to grow by 4.6% in 2004 and 3.5% in 2005 while the latest estimates concerning 2006 turn around 8.1%.

Morocco achieved significant results regarding public life democratisation, education and health, or the reinforcement of basic infrastructure. However GDP growth remains volatile: 4.2% in 2004, modest 1.7% of 2005 (impact of bad agricultural performances), good 2006 performance (6.7%). The textile industry began to recover in 2006 and so did the phosphate exports. The services surplus combined with the growth in tourism earnings did the rest.

The Syrian economic landscape, which depends largely on the public sector, is changing thanks to a programme of structural reforms which aims at creating a more private business‐friendly economic environment, without neglecting at the same time social concerns. Growth rates however have been stagnating between 2 and 3% over the pas few years (2% in 2004, 3.8% in 2005, 2.9% estimates in 2006). The main

Economic overview

contributors to growth are the agriculture, the building and public works sector and services.

Tunisia chose very early the development of a market economy and a progressive integration in the world economy. Between 1992 and 2004, the GDP increased by a yearly average of 4.1%. After the 2004 peak at 5.8%, real GDP growth rates fell to 4.2% in 2005 and 4.6% in 2006. In spite of the intensification of international competition and the strong increase in oil prices, the achievements of 2005 are generally positive and this, because of the favourable development of services such as tourism (6.4 million tourists and earnings amounting to 2,563 million DT, that is 12.5% of the current‐account receipts), air transport, telecommunications and new technologies.

A candidate since 1999, Turkey is officially in negotiations to become a full member since October 3, 2005 and is committed to implement a long list of reforms based on 35 points in conformity with the Copenhagen criteria. Turkey recovers little by little from the economic crisis of 2001 thanks to its sound macroeconomic policy. Supported by a dynamic domestic demand, the economy experienced a spectacular growth of the GDP (8.9% in 2004 and 7.4% in 2005). Recent obstacles affecting the outcome of Turkey’s EU accession negotiations combined their effects with those of a sharp tightening in monetary policy to lower down to 5.2% the 2006 estimated growth rate.

The Euro-Mediterranean partnership and the new neighbourhood policy

The Euro-Mediterranean partnership and the MEDA programme The Euro‐Mediterranean Conference of Ministers of Foreign Affairs held in Barcelona on 27‐28 November 1995 marked the starting point of the Euro‐Mediterranean Partnership. The thus‐named Barcelona Process represents a wide framework of political, economic and social cohesion between the 15 Member States of the European Union and their 12 Southern Mediterranean Partners (Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Palestinian Authority, Syria, Tunisia, and Turkey).

The Barcelona Process is a unique and ambitious initiative, which lays the foundations of a new regional relationship. The three main objectives of the Partnership are:

The definition of a common area of peace and stability through the reinforcement of dialogue concerning politics and security (Political and Security Chapter).

The construction of a zone of shared prosperity through an economic and financial partnership and the gradual establishment of a free trade zone (Economic and Financial Chapter).

The bringing together of different peoples through a social, cultural and human partnership aimed at encouraging cultural

The Euro-Mediterranean partnership

understanding and exchange (Social, Cultural and Human Chapter).

The economic objective is the creation of a free trade area which must be implemented through the Euro‐Mediterranean agreements as well as free trade agreements to be concluded between the MEDA countries themselves (South‐South co‐operation). The year 2010 was chosen as the official deadline by which the region should be organised as a free trade zone in conformity with the WTO principles. Therefore, tariff and non‐tariff obstacles to the exchanges of manufactured goods will be gradually eliminated according to timetables to be negotiated between the partners. A staged liberalisation of agriculture and services trade is also considered, under the terms of article V of the General Agreement on Trade in Services (GATS).

Anticipating the enlargement, the European Commission initiated, on March 11, 2003, the definition of a new European neighbourhood policy (ENP) in order to strengthen relationships with EU‐27 neighbours (Eastern and Mediterranean countries). It offers them new opportunities toward economic integration, as a reward for real progress in the respect of common values and in the effective implementation of political, economic and institutional reforms (harmonisation of their legislation vis‐à‐vis the ʹacquis communautaireʹ).

The EU thus offers to its Eastern and Mediterranean neighbours a chance to gain access to the European domestic market and to benefit from the correlative freedom of movement for goods, services, capital and people.

The European Council of June 2004 approved the principle of the adoption, through a dialogue with each country having enforced the agreement with the EU, of individual roadmaps for the implementation and follow‐up of this agreement. Seven triennial action plans were adopted by the end of 2004 (5 MEDA countries,

Israel, Jordan, Morocco, Tunisia and Palestinian Authority, plus two Eastern countries, Ukraine and Moldavia) while discussions are in progress with Egypt and Lebanon. As operational tools co‐designed with the Mediterranean partners, the action plans identify priorities regarding political and economic reform, and reinforced cooperation. The MEDA and TACIS financial instruments were used to support the implementation of the action plans until the end of 2006.

With respect to MEDA, 45 million Euros were dedicated to the European neighbourhood policy (ENP) over the period 2004‐2006: 18.5 million Euros for energy infrastructures, 24 million for transport, 2 million for the co‐operation between Morocco and Spain, and Spain and Gibraltar (0.4 million Euros).

From 2007, the Commission foresees the creation of a single European Neighbourhood and Partnership Instrument (ENPI) covering at the same time the EU support for the ENP countries and their cross‐border co‐operation with the Member States. The amounts dedicated to the ENPI, as well as the distribution between its components, will depend on the next financial negotiations for 2007‐2013.

Other political processes have to be taken into account concerning regional integration: the progress made in the Doha Round, justice and home affairs’ matters, the promotion of a better governance, humans right and democratisation in the MEDA region, and finally environmental initiatives connected to the conclusions of the Johannesburg summit on sustainable development.

The latest WTO round, the so‐called Doha Agenda, deals with both new markets’ opening and the definition of additional rules. It offers in turn the commitment to strengthen material assistance for the benefit of developing countries. The main objective of the new round is to facilitate the integration of developing countries into the world trade system in order to fight poverty.

The conclusions of the Tampere (1999), Santa Maria Da Feira (2000) and Seville councils (2002) laid down a common policy concerning the integration of justice and home affairs matters into the EU external policy. The action plan adopted in Valencia (2002), in addition to the statement of Barcelona, provides additional guidelines for a reinforced co‐operation in the MEDA region and this, in three principal fields: migration, judiciary reform and fight against criminality. A better governance, the promotion of democracy and the respect of human right constitute fundamental objectives for the EU foreign policy.

In line with the conclusions from the UNDP report on human development in the Arab world, the Commission made public a communication entitled ʺReinvigorating EU actions on human rights and democratisation with Mediterranean partners. Strategic guidelinesʺ [COM(2003) 294 final] aiming at maximising the effectiveness of the instruments at the disposal of the EU and its Mediterranean partners in the field of humans right and democracy. The communication lays down operational guidelines in order to promote humans right and fundamental freedom in co‐operation with the Mediterranean partners. It includes ten concrete recommendations to improve political dialogue between the EU and its Mediterranean partners, including the use of financial co‐operation on the questions of human rights. The 2003 World Bank report on governance in the MENA region also constitutes a significant reference. The EU programmes over 2005‐2006 took into account these essential questions, through the economic management programmes ONG II, Police II and Rural Proximity for instance.

A global commitment to the cause of sustainable development was reiterated at the Johannesburg summit in the form of a pragmatic and ambitious programme demonstrating the increasing importance of environmental questions in the achievement of the ʺMillenium Development Goalsʺ. With respect to the EU, the key

sectors concerned by this commitment are water and energy. In Johannesburg, the EU launched therefore two partnerships. The European initiative ʺWater for Lifeʺ articulates the existing financial mechanisms with specific emphasis on three parameters: water supply, hygiene and integrated resource management. At the present time, the concrete follow‐up concerning the Mediterranean countries is on its way within the framework of the MEDA funding instrument.

For more information, refer to the Euro‐Med Partnership document at the following address:

http://ec.europa.eu/comm/external_relations/euromed/rsp/meda_nip05_06_fr.pdf

The MEDA and FEMIP financial instruments and the institutional twinning The Euro‐Mediterranean Partnership also provides financial co‐operation instruments to support economic change in the Mediterranean partners’ countries: MEDA and FEMIP.

Created by the Cannes Council in June 1995, the MEDA programme constitutes the main financial framework for the implementation of the Euro‐Mediterranean Partnership. The European Commission, in close co‐operation with each of its Mediterranean partners and while taking account their diversity, launched assistance programmes for economic transition, following a bottom‐up approach and financed under the MEDA programme. These assistance programmes deal with promoting reforms and developing the private sector (through supporting more specifically SMEs and industrial sectors, modernising the financial sector, facilitating trade, contributing to fruitful privatisations and supporting private participation into the much‐needed infrastructure investments, etc..). Within the framework of MEDA

II, local management of the MEDA programmes by the EU delegations in the benefiting countries was given more importance. The funds engaged over the period 1995‐2006 amounted to approximately 8.8 billion Euros, benefiting the official authorities (national and local) as well as the private sector and the civil society.

Managed by the European Investment Bank of (EIB), the Facility for Euro‐Mediterranean Investment and Partnership (FEMIP), had injected a total of Euro 7.2 billion by the end of 2005 into 77 operations in favour of economic modernisation, the establishment of a business‐friendly environment, the development of the private sector and the creation of jobs in the recipient countries.

FEMIP’s existence was confirmed by various Ecofin ministerial conferences (in particular, in June 2006 in Tunis). It currently intervenes in several priority fields: the construction of infrastructures supportive to the development of the private sector, local private projects, environmental projects, and the development of capital markets.

Since its creation in October 2002, the FEMIP was gradually strengthened, without however becoming a full Euro‐Mediterranean development bank, given that its capital is exclusively held by European countries, while its expertise remain essentially focused on infrastructure and major public projects. Only a few countries support the emblematic constitution of a generalist Euro‐Mediterranean bank. Even a modest start, such as launching a subsidiary controlled by the EIB, would still demand a significant capital base given the current loan and equity portfolio in the region. The creation of such an institution would also cause a rise in the interest rates (lower rating, higher operational costs) and would require co‐decision with the new shareholders.

The EIB tries to address the challenge by consolidating the existing assets, by improving the integration of the many actors involved in

managing the FEMIP (this deeper integration could mean creating local offices, transform the experts committee into a steering committee associating Southern countries), by considering new tools (guarantee scheme, for example) and finally by directing more and more its activities towards the difficult market of SMEs and private investment. For this reason, the FEMIP accentuates its efforts towards the productive sector, not only by opening credit lines managed by commercial banks for the financing of industry, but also as a shareholder in capital investment funds.

In the future, it could play a role even more effective if it could lend in local currency and rely on a more comprehensive expert team, closer to the Mediterranean customers (the EIB is, by far, the development bank whose ratio of staff over capital invested is the lowest, a difficult situation when dealing with mid‐size projects and SMEs..

The volume of loans granted for the benefit of the Mediterranean partners (MEDA) reached 1.8 billion Euros in 2003, 2.1 billion in 2004 and 2.2 billion in 2005. During this 2005 year, 51 % of the resources were dedicated to support the private sector. Nearly 35 % of these operations were carried out in partnership with the local banking sector, in order to strengthen its capacity in financing SME productive investments.

The FEMIP also gave its support to basic infrastructure in the transport and environment sectors (Turkey, Lebanon, Morocco), in energy (Egypt, Gaza‐West Bank, Syria), and communication (Syria, Lebanon, Morocco and Turkey).

In addition, the year 2005 is to be remembered as the year during which funding operations in the Gaza Strip and West Bank resumed, with the granting of two loans for concrete improvements in the living conditions of the Palestinians: one regarding power supply, and the other to set up a guarantee fund to support SMEs.

Figure 6. Distribution of FEMIP loans by country in 2005 (in million Euros)

Algeria10 Egypt

Palestine55Lebanon

Morocco160

Syria300Tunisia

Turkey930

As regards the geographical distribution of FEMIP loans (figure 6), 42% of them relate to projects in Turkey (including 6 projects amounting to 930 million Euros), 38% in the Middle East (10 projects for a total amount of 834 million Euros) and 20% in Maghreb (7 projects for 430 million Euros).

The FEMIP’s versatile set of instruments makes it able to meet the needs of local economies. It includes various financial products such as long‐term loans, risk capital etc., under favourable financial conditions. Its technical assistance fund launched in 2004, signed during its first year of existence, 20 contracts for a total of 13.8 million Euros (gifts). Lastly, FEMIP’s fiduciary fund, operational since the beginning of 2005 (thanks to Member States ‘contributions amounting to 30 M€), further broadened the range of financial instruments at its disposal.

More means will be also devoted to technical aid, in order to facilitate the preparation of social and anti‐poverty projects in the recipient countries. In addition, to mark its physical presence on the southern bank of the Mediterranean, the EIB made the choice to establish offices in three capitals (Cairo, Tunis and Rabat). Lastly, it is worth mentioning that an overall evaluation of FEMIP operations was carried out in December 2006, making room for coming changes regarding the future of this instrument.

In order to identify new manners of developing the financial co‐operation on the basis of comparative advantage and to leverage its operational capacity, the FEMIP strengthened its co‐operation with other lenders present in the region by signing agreements with the European development funding institutions (EDFI). This will amplify the support which the EU brings to the economic of its Mediterranean partners, avoid redundancies and maximise the impact of the activities of EU Member States in the region.

Apart from its funding operations, the FEMIP made a study of the national debt markets in the Mediterranean countries (which was published in December 2005) and defined an ambitious programme on the companies’ access to credit. It also published the first detailed analysis on remittances sent by workers of Mediterranean countries emigrated in Europe. On March 13, 2006, the FEMIP signed a partnership agreement with the Euro‐mediterranean network of economic institutes (FEMISE), providing a framework for co‐operation on macro‐economic analysis of the MEDA countries and the financial policy evaluation.

Institutional twinning

The twinning mechanism, familiar since 1998 to the PHARE countries (Central and Eastern Europe), was extended to MEDA in 2004, within the framework of the support programmes to the association agreements, primarily with a view to reforming the

administrative structures of the Mediterranean partners. The amounts range from 5 to 20 million Euros over three years, depending on the countries. The Commission views this instrument as a precursor of the new neighbourhood policy in terms of reinforcement and modernisation of the administrations in the Mediterranean countries. The programme could, in the long term, be open to private operators.

The South-South co-operation Intra‐regional trade is encouraged within the framework of the Agadir agreement, of the Great Arab Free Trade Area (GAFTA) and of the customs union of the Gulf Co‐operation Council (GCC).

The signature of the Agadir Agreement on February 25, 2004 represented a strategic step towards South‐South integration. The Agadir process, launched in Agadir in May 2001 as an intra‐regional South‐South initiative gathering Morocco, Tunisia, Egypt and Jordan, constitutes a bold move by these four partners in order to establish between them a free trade area, in a staged way. The transitional stage was supposed to end by 01/01/2005. This agreement is supposed to stimulate trade, to strengthen the regional industrial basis, to boost economic activity and employment, to increase productivity and to improve the standards of living in the signatory countries.

Similarly, it should foster macro‐economic and sector policy coordination, in particular regarding foreign trade, agriculture, industry, taxation, finances, services and customs. Its contribution to harmonising the economic legislation of the signatory countries should also be important. Concerning the provisions relating to foreign trade liberalisation, the contracting countries adopted a calendar envisaging a total tariff exemption for industrial products by 01/01/2005.

It was also agreed to liberalise agrofood products in accordance with the implementation programme of the Great Arab Zone of Free Trade (GAFTA). Trade in services will be liberalised in accordance with the terms of the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO). The terms of the agreement also give details concerning the application of the Arab‐Mediterranean rules of origin which will have to be put in conformity with the Euro‐mediterranean rules of origin.

The Agadir agreement aims at creating a market of more than 100 million inhabitants. It would involve more efficiency, more pay‐off, and would make the region more attractive for foreign investors. Any Member State of the Arab League and the Great Arab Free Trade Area, also bound by an agreement of association or free trade with the European Union, can adhere to the Agadir agreement after having received the assent of all current Member States.

The EU has pledged to support the Agadir Process from both a financial and technical point of view. The programme “Helping the Association Agreement signatories to develop free trade among themselves and with the EU” was therefore launched in 2003. This 4 million Euros programme, funded under MEDA, aims at encouraging South‐South trade and integration, starting on a sub‐regional basis and at introducing pan Euro‐Mediterranean cumulating of origin. The programme works for the creation of a pool of technical assistance to help progress towards South‐South free trade. The table hereafter (figure 7) recapitulates the trade agreements signed between MEDA countries and with their principal trade partners.

Figure 7. Main bilateral and regional free trade agreements in MEDA AA

with EU

Other FTA

Algeria

Egypt Israel

Jordan Lebanon Morocco Syria Pales tine

Tunisia

Turkey

Algeria S 4/02 E 9/05

GAFTA S

UMA S 2/89

Egypt S 6/01 E 6/04

GAFTA E 1/05 The USA

Agadir S 2/04

S 12/05

Israel

S 11/95 E 6/00

The USA

FTA S 12/04

S 94 E 95

S 3/96 E 5/97

Jordan S 11/97 E 05/02

GAFTA E 1/05 The USA 10/00

Agadir S 2/04

FTA S 6/98 Agadir S 2/04

Agadir S 2/04 FTA S 98 E 6/99

Neg. 06

Lebanon

S 06/02 E 04/06

S 9/98 E 2/99

Morocco

S 2/96 E 3/00

GAFTA E 1/05 The USA 6/04

UMA S2/89

Agadir S 2/04

Agadir S 2/04 UMA S 2/89

S 4/04 E 1/06

S 10/04 GAFTA E 1/05

Palestine

S 2/97 IA E 7/97

GAFTA E 1/05

S 94 EE 95

S 7/04

Tunisia

S 7/95 E 3/98

GAFTA E 1/05

UMA S02/ 89

Agadir S 02/04 FTA

S 03/98

Agadir S 2/04

Agadir S 2/04 UMA S 2/89

S11/04 V7/05

Turkey CU S 96 E 96

S 12/05 S 3/96 E 97

Neg S 4/04 E 1/06

S 12/ 04

S 7/04 E6/05

S 11/04 E 7/05

Source: The Euromed process in the trade area, update 03/06 and updated ANIMA, Déc. 2006.

Legend: AA: Association Agreement with the EU; IA: Interim agreement; S: Signed; E: Enforced; CU: Customs Union; Neg.: In negotiation; The USA: agreement of free trade with the United States

GAFTA: Convention of facilitation and development of Pan‐Arab trade of 17/02/1981. Into force since January 1, 2005. The 18 signatory countries are Saudi Arabia, Bahrain, Egypt, United Arab Emirates, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Somalia, Syria and Yemen. Sudan and Tunisia are in the course of ratification. Algeria, the Comoros, Djibouti and Mauritania did not approve the agreement.

Business opportunities in MEDA countries

Algeria

Overview

References

Capital Algiers Surface area 2,382,000 km2 Population 2003 33.9 millions inhabitants (2005) Languages Arabic, French, Berber GNP (dollars) US$ US 102 bn (2005) GNP/per capita (dollars) US$ US 3,085– 7,189 in ppp. (2005) Currency (2005) Algerian Dinar (DZ).

1 Euro = 95,19 DZ – 1 US$ = 71,23 DZ Religion Sunni Muslims (99 %) National holiday 5th July (independence in 1962) Association Agreement with EU

Signed in2002, implemented on 1st September 2005. EU web site: http://www.deldza.cec.eu.int

WTO membership Observer since 1985. Membership being negotiated.

Sources: World Bank, FMI, World Development Indicators 2006 and IMF, Article IV Consultation 2005, Country report.

Invest in Algeria

Economic profile

Contingent to Europe, Africa, and Arab nations, Algeria is the largest of the five Maghreb countries (Mauritania, Morocco, Algeria, Tunisia and Libya), the second largest country on the African continent after Sudan and tenth largest in the world. This strategic geographic location offers many advantages likely to boost investment potential, in particular foreign investment in export‐oriented activities. The hydrocarbons sector is the backbone of the economy. At the beginning of the 90s, the Algerian government started a process of transition from a centralised to a market‐oriented economy by implementing stabilisation and structural adjustment programmes with the technical assistance and financial support of the IMF, the World Bank, and the European Union.

A significant progress has been made in structural reforms thanks to this programme, financial and economic indicators have been successfully stabilised, and a more dynamic private sector is emerging, attracting greater inflows of foreign direct investments (FDI). Algeria’s economic growth has continued to be underpinned by ongoing growth in oil and gas exports, (revenues from hydrocarbons represent 97 percent of export earnings from goods and non factor services), leading to a large increase in the trade surplus (US$ 50 billion). Thus, GDP grew from around 3 percent in 2000‐02 to nearly 6 percent in 2003‐04 and 5.1 percent in 2005. Thanks to taxes on oil, which represent more than 60 percent of public revenue, this comfortable financial situation led authorities to pursue an expansionist budgetary policy and launch the Complementary Plan for Support to Growth (Programme complémentaire de soutien à la croissance – PCSC), which earmarks public expenditure for the period 2005‐09, and the National Programme for Agricultural Development (PNDA).

Per capita GDP rose from US$ 1,783 in 2002 to US$ 3,100 in 2005, with purchasing power parity estimated at US$ 7,189 in 2005, fuelling an improvement in living standards throughout Algeria.

Multi‐year projections in the 2005 finance law show an average growth rate of 5.3 percent a year over the period 2005‐2009. Prudent management of oil income has enabled Algeria to reduce debt while maintaining reserves. Thanks to the Central Bank of Algeria’s restrictive monetary policy, inflation was kept down to 3.6 percent in 2004 and 1.5 percent in 2005. With public debt rolled back to 24.7 percent, foreign‐exchange reserves equivalent to nearly 24 months of imports and a surplus in the overall budget, Algeria has finally succeeded in attaining economic stability. The unemployment rate fell from 23.7 percent in 2003 to 17 percent in 2004 and 13 percent in 2005.

The State continues to play a dominant role in managing the economy, though its role is decreasing. The State continues to own most arable lands and real estate and dominates investment, concentrated in the hydrocarbons sector. Many sectors have been opened to privatisation over the past two years: telecommunications, maritime and air transport, agriculture, tourism and mining as well as energy. Nearly 400 public entities have been privatised or shut down since the beginning of the privatisation process but there remain some 1200 to be privatised. The government announced recently that all State‐owned companies are eligible for privatisation except those working in strategic sectors like Sonatrach (oil) and Sonelgaz (electricity).

Moreover, economic and institutional reforms launched in various sectors testify to the authorities’ firm determination to integrate Algeria into the global economy. The main social and economic challenges facing the country are:

Intensification of structural and institutional reforms;

Ongoing liberalisation of foreign trade;

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State disengagement from production, in a move to attract private investment;

Promotion of know‐how and transfer of expertise;

Improved prospects for growth;

Diversification of the production base and strengthening of the non‐hydrocarbon industrial sector;

Restructuring of financial services.

A capital expenditure programme was launched in 2001, called the Support to Economic Recovery Programme (PSRE), endowed with a US$ 7 billion budget that accounted for 8.5 percent of GDP in 2004 and covering the period 2001‐2004, which made it possible to boost growth in the short run. This was then supplemented by a complementary programme to support growth (PCSC) and another targeting wilayas in the South and the high plateaus, with a preliminary investment budget of US$ 65 billion (DZ8000 billion) for the 2004‐2009 period.

The second PCSC focuses on six main priorities: improvement of living conditions (US$ 25 billion), development of infrastructure (US$ 22 billion), support for economic development (US$ 4 billion), development of regions in the south and high plateaus (US$ 10 billion), modernisation of public utilities (US$ 3 billion), and development of new communication technologies (nearly US$ 1 billion). Sector‐wise, the programme gives priority to major infrastructure projects in transport, public works, and housing. The list of projects is available at: http://www.cg.gov.dz

Algeria’s external position has improved. The trade balance surplus rose to US$ 25.64 billion in 2005 (up 86 percent over the 2004 figure) thanks to a significant increase in income from exports (43.4 percent). The rate of coverage of imports by exports rose from 175 percent in 2004 to 226 percent in 2005.

Imports rose to US$ 20.35 billion in 2005, made up primarily of capital goods (42.3 percent of total), especially transport equipment, machinery, telecommunication equipment, and pumps. Imported foodstuffs account for 17.6 percent of total, worth US$ 3.6 billion, made up of cereals, semolina and flour. Hydrocarbons dominate exports, representing 98.0 percent of total volume in 2005. Soaring oil prices worldwide made it possible to record a 44.1 percent increase in revenues compared to the 2004 figure. Non‐hydrocarbon exports remain marginal.

The European Union is Algeriaʹs largest trading partner, followed by the US. Imports from the EU reached US$ 11.26 billion in 2005, France being its number one supplier with a market share of 22 percent, followed by Italy (7.5 percent) and Germany (6.2 percent). Exports to the EU came to US$ 25.6 billion, Italy being its primary client (16 percent), followed by Spain (11 percent) and France (10 percent).

France is the third largest investor in the country, behind the US and Egypt. Foreign direct investment (FDI) in the hydrocarbons sector grew from US$ 671 million in 1999 to US$ 2.3 billion in 2003. Over the period 1999/2003, foreign companies in partnership with Sonatrach and its subsidiary companies in exploration and development of existing oil fields invested a cumulative US$ 8.6 billion in projects. New legislation relating to hydrocarbons opens up opportunities for foreign investment in Algeria’s oil sector, including exploration, pipelines and transport as well as downstream operations such as petrochemical processing.

In December 2001, Algeria and the EU concluded negotiation of the Association Agreement, ratified in March 31, 2005 and effective since September 1, 2005. The Association Agreement will commit both parties to further liberalisation of bilateral trade and is intended to have Algerian businesses and consumers share in the benefits of enhanced trade and investment ties. The Agreement

Invest in Algeria

provides for the gradual removal of import duties on EU industrial products over twelve years and eliminates duty on 2000 other products. It also provides for an exchange of concessions regarding trade in services. Negotiations for Algeriaʹs accession to the World Trade Organisation are in the final stages.

Country risk

The main export‐credit insurers and international credit rating agencies (Coface, Hermes, Sace, ECDG, CEFCE, Eximbank) revised downward their evaluations on Algeria’s risk over the course of the past two years. The country passed from the 5th to the 4th place on OECD credit insurers’ risk scale. The French Coface reclassified in January 2006 its notation up to A4 from B. This comes as an encouraging confirmation of the improvement of the general business climate in that country. During its 2005 consultations under the terms of Article IV, the International Monetary Fund also foresaw a bright macroeconomic prospect for the five years to come, as a consequence of the energy prices but also of the real efforts made in terms of structural reforms.

Key challenges

Renewed growth is being led mainly by oil resources, a particularly vulnerable development model in the long run. With 48 percent added value, the hydrocarbons sector is the main source of revenue for the economy (95 percent of export earnings). This makes Algeria’s external position particularly vulnerable, with Algerian exports among the least diversified of all middle‐income countries.

Algeria must diversify its petroleum‐based economy, which has yielded a large cash reserve but which has not been used to redress Algeriaʹs many social and infrastructure problems, jeopardizing the economy’s external competitiveness as it faces entry into force of the Association Agreement with the EU and on‐going negotiations on accession to WTO.

The relatively high unemployment rate (13 percent according to ANDI official figures) is detrimental to social development and unemployment among young people remains persistently high (45 percent).

Agricultural development faces multiple constraints, in particular a shortage of agricultural land, insufficient output, and heavy dependency on weather conditions.

Strong points

Algeria’s major assets and comparative advantages are as follows:

Proximity and easy access to potential markets. Contingent to Europe, Africa and Arab countries, Algeria’s strategic location greatly boosts its investment potential, particularly attractive for export‐oriented foreign investment;

Large domestic market (33 million consumers);

Important natural resources (oil, gas, etc.). Other mineral resources remain greatly under exploited, particularly phosphates and iron;

Abundant human resources and flexible labour market, the many universities, national;

University level colleges specialised in professional training (grandes écoles) and vocational training centres ensuring the availability of skilled personnel.

The National Investment Development Agency (ANDI) The entity responsible for direct foreign investment in Algeria is the National Investment Development Agency (ANDI). The country’s first investment code was announced in 1993 and the

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ANDI, following on from an initial agency (APSI), was created in 2001, with the adoption of the new law on investments.

The ANDI has the responsibility to accompany both national and foreign investors, to facilitate administrative procedures, and grant tax exemptions, rebates and other incentives. It is part of a national network of one‐stop units respectively in charge of each of the regions of the country (wilaya), so as to simplify and coordinate investment procedures and the creation of businesses. A central structure dealing with foreign investments has been created within the Head Office of the Agency.

Administrative supervision

The ANDI is placed directly under the authority of the Head of Government, and constitutes one of his services. However, the Minister Responsible for the Promotion of Investment and Participation has operational responsibility for the ANDI.

The ANDI’s missions are:

To define actions to highlight the comparative competitive advantages of the Algerian economy;

To design mechanisms of support for the promotion of investment and the follow up of their good execution;

To suggest to the government all useful legal and economic measures to improve investment and reduce the formalities for the projects under way;

To follow up the good operation of the decentralised one‐stops;

To support the organisation, at both national and international level, of forums, seminars and meetings for the promotion of investment.

http://www.andi.dz/

How to invest in Algeria The opening of the Algerian economy has increased significantly in recent years to a market‐oriented economy. Seeking to diversify and modernise the economy, the Algerian government has embarked on an aggressive liberalisation programme to attract foreign direct investment.

The investment code was revised by Ordinance n°01‐03 of 20 August 2001 on investment promotion. It governs domestic and foreign investment in the economy to produce goods and services and provides a framework for concessions and licensing regulations.

The Ordinance recognises the principle of freedom to invest in any and all activities, including those covered by specific regulations (hydrocarbons, financial institutions or insurance companies) and there are no restrictions on the percentage of capital that can be held by a foreign investor (except in hydrocarbons, where foreign companies can own no more than 71 percent of capital).

In addition, all State‐owned companies are now open to privatisation. Legislation provides an appropriate legislative framework that harmonises rules and reaffirms requirements for transparency and regularity in privatisation transactions under the supervision of the Council of State Holdings (CPE).

It also provides incentives for investors and introduces new measures to promote investment, such as creation of the National Investment Council (CNI) chaired by the Head of State, created to strengthen the legal and regulatory framework for investment. The CNI is in charge of defining investment strategy and priorities, approving special investment incentives by sector, and giving final authorisation for special investment schemes.

Any initial founding, extension, rehabilitation or reorganisation carried out by a legally constituted economic entity engaged in the

Invest in Algeria

production of goods and services other than trade is eligible for the incentives available under the Investment Code whether it is a resident or non‐resident company.

A comprehensive tariff reform has been in effect since 2001, reducing the average tariff rate from 26 percent to 19 percent. 2001–05 temporary additional duty on certain imports is being phased out as planned. Important steps have also been taken to liberalise the hydrocarbons and telecommunications sectors.

Under the investment code, the generic incentive regime includes exemption from VAT for goods and services directly related to the investment as well as exemption from transfer taxes on real estate related to the investment. A second category of incentives offered on a case‐by‐case basis includes: exemption from corporate income taxes, exemption from VAT for goods and services directly related to the investment, and exemption from transfer taxes for real estate related to the investment. In addition to the above‐mentioned incentives, special incentives are also available for investment in special development zones and investments that use environmental or energy saving technologies. Additional incentives are available to companies whose production and investments are export‐oriented.

There are five free trade zones in Algeria where investments are exempt from all customs, taxes and other fees. The law also grants essential guarantees for investments, such as:

Respecting international standards relating to foreign investments: national treatment and most favoured nation clauses

Transfer policy: according to the 2001 investment code and the 2003 law on currency and credit, foreign investors are authorised to repatriate profits, even if revenues exceed the original amount invested, provided that the initial investment was made in convertible currency. Foreign investors are also

free to repatriate dividends, profits, and real net income resulting from transfer of assets or liquidation.

Nationalisation and expropriation: The Constitution of 8 December 1996 provides legally‐binding guarantees against expropriation and confers the right to equitable compensation. The Constitution also guarantees private property and freedom of trade and industry.

Dispute settlement: Algeria has signed the convention of the International Centre for the Settlement of Investment Disputes (ICSID), ratified its accession to the New York Convention on arbitration, and is a member of the Multilateral Investment Guarantee Agency. The Code of Civil Procedures allows both private and public sector companies full recourse to international arbitration at ICSID or ad hoc arbitration at the U.N. Commission on International Trade Law (UNCITRAL) model for dispute settlement between the Algerian State and private companies. Algeria has also signed several bilateral investment agreements for the protection and promotion of investments with 27 countries as well as 12 bilateral treaties to prevent double taxation.

Investors wishing to enter the Algerian market can either open a branch office or set up a company by creating a legal entity under Algerian trade law, a joint venture with an Algerian resident (private individual or corporate entity) by creating a mixed investment Company (SEM), or securing shares in the capital of an already existing company. A recent law (passed in 2005) requires that all companies working in foreign trade increase capital stock equity to a minimum of DZ20 million (about US$ 275,000) by 26 December 2005.

Possible legal forms for a new company are: joint stock company (SPA), limited liability company (SARL), individual limited

Invest in Algeria

company (EURL), joint venture (SNC), sleeping partnership (SCS), holding company (SP), partnership limited by shares (SCA).

Customs tariff dismantling came into effect on 1 January 2002, based on eight‐digit international HS nomenclature and comprising four customs duty rates: 0 percent, 5 percent, 15 percent and 30 percent, according to the degree of transformation of imported materials. The 5 percent rate is applied on raw materials and capital goods, the average rate of 15 percent to semi‐finished and intermediate products and the highest rate of 30 percent to consumer products. Tax exemptions are also available in some sectors and for the equipment needed for new investments. Customs fees have been removed, but provisional additional duty (DAP) of 12 percent is applied to protect goods produced locally, to be abolished by January1, 2006.

The tax regime is being reformed to increase flexibility, transparency, and simplification. Foreign investors benefit from tax incentives, including five years of tax exemption for companies investing in new projects. As for tax on income, trade companies have to pay: corporate tax (IBS), value‐added tax (VAT), the professional tax (TAP), property tax and water purification tax (taxe dʹassainissement). For tax purposes, Algeria defines ‘foreign company’ as a permanently established business.

The normal corporate tax rate is 30 percent, unless funds are reinvested, in which case a more attractive rate of 15 percent is applied. Income from loans, deposits, and guarantees is taxable at a 10 percent rate, a 20 percent rate is applied on income from management contracts, and a 30 percent rate for anonymous cash vouchers. A new hydrocarbons law was passed in 2005 governing taxation for oil companies.

Finance & banking in Algeria Financial infrastructure is the object of on‐going major reforms to modernise the sector. A more stable macro‐economic framework and financial balances have helped to effectively implement these reforms. The 1990 law opened the banking environment to national and foreign private capital. Thus, of the 22 banks authorised to do business at the end of 2003, over 12 are foreign. Several foreign banks, including French, Belgian and Spanish ones, set up representational offices prior to future establishment. In addition to the introduction of universal banks, the law introduced other financial institutions such as investment banks and leasing companies. A draft law on factoring is in preparation.

The financial sector includes 30 public and private banks and government controlled companies. The bank ratio is around 30,000 inhabitants per agency, reflecting weak density and financial intermediation. Public banks dominate the market, holding 94.4 percent of resources and accounting for 42 percent of GDP.

The State foresees the sale of certain public banks to strategic foreign investors. A number of corrective measures have been taken to restructure balance sheets at public banks and clear up their debt portfolio, proceeding with recapitalisation prior to privatisation, especially the Crédit Populaire d’Algérie (CPA) and the Banque de Développement Local (BDL). Operating licences have been withdrawn from Khalifa Bank, the Commercial and Industrial Bank of Algeria (BCIA), and two other private banks.

The government has taken steps to modernise the financial sector by overhauling outdated banking management methods (stricter ratios and capital requirements, deposit guarantee premiums, tighter performance contracts for public banks), improving service and bank audit standards, modernising payment systems, and computerising banking services to improve quality and data transmission and facilitating banking supervision by the Central

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Bank of Algeria. However, access to loans remains limited. Under‐capitalisation at private banks limits loan capacity in light of prudential standards. Although this situation is likely to continue, Algerian authorities are encouraging banks to increase their capital. Specialised private institutions are starting operations on the money market such as Arab Leasing Corporate.

Movement of capital is free for foreign exchange, as is repatriation of profits. The Algerian Dinar (DZ) is convertible for current operations and commercial activities are eligible for foreign currency accounts.

Telecommunications & internet in Algeria The Government has been carrying out a comprehensive reform in the telecommunications and postal sector since 2000 and a new legal and regulatory framework for a multi‐operator telecommunications system has now been established. The Government published a telecommunications strategy in May 2000 and subsequently (in August 2000) enacted a new postal and telecommunications law creating the Regulation Authority for Postal Services and Telecommunications, the national fixed telephony operation Algeria Telecom, Algeria Telecom Mobile that has now become Mobilis, and the postal operator Algeria Post.

The Governmentʹs strategy in this area is to gradually liberalise all telecommunications and postal service market segments. According to the World Bank, Algeria’s telecommunications market has become the most liberalised market in the MENA region, with growing competition leading to significant investment, the sale of several cellular telephone licences, VSAT, GMPCS and fixed telephone licences. This should lead to the opening of capital in the state owned Algeria Telecom and its subsidiary companies in 2006.

The first private mobile telecommunications operator, Orascom Telecom Algeria (commercial name “Djezzy”) from Egypt started business in 2001 and currently services 5 million subscribers, followed by the Saudi Wataniya Telecom Algeria “Nedjma” (500,000 subscribers) in 2004. Two VSAT licences were also awarded in 2004 to Djezzy and a consortium of Monaco’s Divona Telecom and Algeria’s Kpoint Com. A fixed telephony licence was also granted in April 2005 to Orascom Telecom Holding in partnership with Telecom Egypt.

Algeria Telecom, with turnover of DZ 130 billion (approximately US$ 1.885 billion) in 2005, has defined new objectives targeting capacity of almost 7 million fixed lines, 3 million ADSL subscribers and 6 million mobile subscribers by 2008. It plans to invest some US$ 2.5 billion by 2010.

Over 70 percent of the two million fixed telephone subscribers are administrations, public utilities and trade and services companies, while the household connection rate remains very low at less than 30 percent.

The French equipment supplier Alcatel has signed a contract for deployment of a cellular network with Orascom, representing more than 50 percent of infrastructure, the rest of equipment being provided by the German company Siemens. Ericsson holds a majority share in the infrastructure of the Mobilis GSM network. Chinese suppliers like Huawei and ZTE are very active, mainly on the telegraphic telephony market, administration PABXs, and mobile and fixed telephony. The French ISP Wanadoo (a subsidiary of France Telecom) has signed a technical assistance contract with EEPAD, the leading internet service provider.

The internet, operational since 1997, is serviced by about fifteen Internet Service Providers (ISP) for 700,000 users.

Market opportunities: the new fixed telephony licence sold to a consortium made up of Orascom Telecom Holding and Egypt

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Telecom in 2005 for US$ 65 million is a good business opportunity for equipment suppliers, with planned investments of US$ 1 billion over ten years. Several small alternative operators who have launched public phone services also constitute an opportunity for supply of equipment as well as services. All new ICT services present market opportunities over the short‐medium term (call centres, VoIP, SMS Gateway, contents).

The electronics industry has recorded fast growth these past few years, up from 5 to 10 percent per annum. According to the Ministry of Industry, turnover in the electrical and electronics sector came to some US$ 33 billion in 2001. Algeria has a very favourable tax system and low energy costs, both of which are attractive incentives for investors. Although electronic industry structure continues to be dominated by public companies (60 percent of the production), private companies like BYA Electronics and Maghreb Vision are leaders on the local market. These companies play an important role in imports and in manufacturing electronic products under licence from international corporations.

Business opportunities in Algeria After years of economic stagnation, Algeria is today confronted with an important challenge: strengthening and diversifying its economy. This challenge is analysed in development plans and priority initiatives programmed. Algerian authorities are using various tools to encourage and facilitate investments in strategic sectors. Various supporting funds are also available.

To improve the external competitiveness of enterprises and prepare them for a widespread privatisation programme, several upgrading programmes for public and private enterprises have been launched, including the Programme for Industrial Competitiveness managed by the Ministry of Industry with assistance from the United Nations Development Programme (UNDP), the United

Nations Industrial Development Organisation (UNIDO) and the Euro‐Development Programme for Small and Medium‐sized Enterprises (Programme Européen de Développement des PME – EDPME), with support from the European Commission. In addition to these co‐operative programmes, a new programme for upgrading small and medium‐sized enterprises was announced in June 2005 and entrusted to the national agency for the development of small and medium‐sized companies (Agence Nationale de Développement des PME), set up for this purpose. All this public support will hopefully enable small businesses to stand up to the increased competition resulting from the association agreement with the European Union and application of WTO multilateral rules.

Partnership between Algerian and foreign companies is advancing by leaps and bounds. The Ministry of Industry lists projects proposed for partnership and ensures wide diffusion. The process for total or partial privatisation of public companies as well as projects related to the conversion of foreign debt to investment has been launched anew and this development creates very attractive options for foreign operators.

Negotiations for WTO accession have reached an advanced stage. Efforts continue to modernise the legal framework in line with WTO rules, with revision of trade law and promulgation of new legislation on international trade, free trade areas, protection of intellectual property rights and competition.

According to a recent market study, the Algeria’s needs for national and foreign direct investment (FDI) are estimated at DZ 570 billion by 2010. If the investment climate improves, Algeria could attract between EUR 3.6 and 4.3 billion of FDI a year.

At the beginning of 2006, the Minister of Holdings and Investment Promotion (MPPT) announced that the privatisation process would be accelerated to reach at least 500 companies (out of 1,055

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targeted) by the end of the year. The list of these companies is available online at: http://www.mppi.dz/Annuaire/index.asp

Agriculture, fishing and food processing industries

The sector has considerable economic potential and agricultural imports amount to the equivalent of US$ 3 billion per annum. During the years of centralised economy, Algeria gave high priority to heavy industry, neglecting the strategic value of agriculture. In the National Plan for Agricultural and Rural Development (PNDA), the Government has developed a new vision for agricultural and rural development, outlined in the 2004 Sustainable Rural Development Strategy. These programmes seek to reduce imports and provide food security by diversifying farm production: cereal crops, tree cultivation (especially olive trees), wine growing, market gardening and husbandry.

However, the question of foreign ownership of land is a burden likely to act as an obstacle to investment in agriculture and industry. This issue needs to be resolved soon.

Many opportunities exist in the fields of food processing, conservation technologies, and marketing initiatives as well as in transfer of expertise/capacity building and sharing of knowledge.

With 1,250 km of coastline on the Mediterranean, Algeria has major potential for fishing, long underestimated and unexploited. Since 2003, several protocol agreements for fishing, conservation, and supply of equipment have been signed by Algerian economic operators and foreign companies. Thus an aquaculture project to breed sea perch and sea bream has been launched, with investment of EUR 8 million, under the supervision of the National Office for Aquaculture Development with the support of the Arab Organisation for Agricultural Development (AOAD). The private “Union Bank” has set up a specialised subsidiary company to develop industrial fishing.

The fisheries sector in Algeria has strong potential, but the need for upstream and downstream support is considerable. Opportunities exit for trawlers, equipment (electronic navigation), nets, and other materials required for fishing. Similarly, there is considerable need for technical support, training, and evaluation of fishery resources. There are considerable prospects for processing industries, especially canning facilities, transformation of sea products and activities related to canning, freezing, cold storage and door‐to‐door cold transportation, packaging, distribution, etc.

Water sector

Algeria suffers from a chronic water deficit, worsened by persistent bad weather and high population growth in large urban centres. The water resources strategy focuses on expanding storage facilities by building new dams and desalination plants and better rehabilitation/management of existing infrastructure. A new water code was adopted in 2005, targeting reduction of the critical supply‐demand gap, and the Government has earmarked public investment for a 10 year integrated water resource management initiative. A number of BOT and concession projects will be launched over the short and medium terms.

The time frame has been stepped up for urgent investments and alternative schemes launched for water production, such as desalination plants under BOT schemes. An ambitious programme has been initiated to attract the participation of private international operators in water distribution in the largest cities and World Bank assistance has been requested for this purpose. Many opportunities have been identified in the various market segments (infrastructure, processing, purification, distribution, studies.). Currently, the main initiatives include:

Ongoing construction of a hydraulic complex at Beni‐Haroun in the region of Constantine, which counts several dams, the second largest pumping station in Africa, and several water

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purification units. At the end of 2001, the Alstom group was awarded the contract for pumping operations, worth EUR 150 million;

The contract for the Kourdate Acerdoune dam was awarded to the RAZEL company, worth about EUR 110 million;

The Bredeah wastewater demineralisation plant is being implemented by the Ondeo‐Degremont company;

Rehabilitation of the water purification networks of Algiers and Oran was entrusted to SAUR for Oran and SEM for Algiers.

Multilateral investors and donors also give priority to the water sector, with US$ 4 billion in investment planned over the next fifteen years. The majority of building sites will be accompanied by studies and contracts for assistance to supervise the work. Projects planned by the Algerian government include the following:

Finalisation of the Beni‐Haroun complex, expected to encompass civil engineering works (dams, tanks, reservoirs, tunnels) and hydroelectric equipment;

Construction of the water supply network serving the city of Algiers and settlements along the Tizi Ouzou‐Algiers corridor that uses water resources based in Taksebt. This project, estimated at a cost of some EUR 600 million, was allotted to the French‐Canadian consortium SNC Lavalin‐Ondeo Degremont Services;

The MAO project for the water supply network serving Mostaganem, Arzew and Oran includes the construction of dams, water pipes, and pumping and treatment stations;

A drinking water supply project for the corridor of Chlef, Tenes, and El Guelta;

Rehabilitation of distribution networks for Annaba, Constantine and Jijel;

Construction of desalination plants to supply the Arzew oil terminal as well as the cities of Algiers, Oran and Skikda. The main projects launched to date are at Arzew and Skikda, where power stations will also be built.

Building and construction

According to the authorities, there is a housing shortage exceeding one million units and high demographic growth means that this figure will be increasing. At least 150,000 residences will have to be built over each of the next ten years in order to keep up with requirements. Over the period 2005‐09, the sector will absorb almost half of the PCSC’s budget. To carry out these ambitious goals for new housing and real estate, the government must secure private sector involvement, from architects and promoters to engineering and building companies as well as building material and equipment suppliers.

Public works, transportation and infrastructure

A comprehensive roadmap for reforms throughout the sector is under way. The Government’s strategy is to modernise, expand transport infrastructure, and attract private foreign and local investment. Large‐scale building, replacement, upgrading, and enhancement efforts are needed in Algeria, from roads and highways to railways, ports/airports, and civil engineering. The objective for commercial services is to privatise the remaining public enterprises and encourage competition in the market. For public goods or services, private sector participation will be sought under concession contracts.

A substantial budget of almost EUR 2 billion has been allocated to upgrade overall transport infrastructure, which deteriorated over the ten years of terrorism. Thus, it is expected that work on the

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Algiers subway, launched more than 20 years ago, will be resumed, with line 1 slated for start up at the end of 2005.

The 100,000 km network of roads remains insufficient to meet the country’s development needs. Paved roads constitute 72 percent of the national network, but a quarter of today’s road network is in bad condition, much deteriorated. The Algerian road network also counts 3350 civil engineering structures, half of which must be rehabilitated. The highway network is no more than embryonic, with only a few hundred kilometres.

The planned 1,216 km long Trans‐Maghreb East‐West motorway launched in 1987 to link Tlemcen and Annaba to the Maghreb motorway (7,000 km from Nouakchott to Tripoli) and recently awarded to Chinese and Japanese BOT consortia, is the most important in a series of large‐scale public works to be completed in the coming years. In addition, a new southern bypass around the capital is expected to break ground in 2005.

As for urban development, efforts to improve traffic flow in the capital include large‐scale building sites to improve access to upland areas. The city of Algiers has been equipped with seven new underpasses, three of which were built by the French company Razel at a cost of nearly EUR50 million. Soletanche‐Bachy, in partnership with the Algerian company Hydrotechnique, is building an underpass in association with a 300 car underground parking lot at the Chevalley intersection. Upcoming work includes a beltway around Wadi Ouchaiah, the Annasser access road, the Oulmane Khelifa exchange and four underpasses at sensitive intersections of the capital (in the districts of Ruisseau, Chateauneuf, Hydra, and Bir Mourad Rais).

National airport infrastructure includes 53 fields, of which 12 are international class airports, eight national class airports, and 14 regional class airports. Currently, capacity remains largely under‐utilised. Major initiatives include airport expansion, notably at the

Algiers Airport (by the Chinese company CSCEC) as well as air navigation and air terminal equipment. Medium‐term development prospects focus on airports renovation and upgrading, new initiatives to open up areas in the high plateaus and the south, and construction of a second runway at the Oran and Hassi Messaoud Airports. An international airport has been built in the region of Chlef.

The harbour and maritime sector counts 11 ports: 8 general‐purpose and 3 specialised in hydrocarbons (Arzew, Skikda and Bethioua). Harbour capacity remains under‐utilised. There are many opportunities for development, notably: maintenance work (dredging of the ports of Bejaia, Algiers, Arzew, Annaba and Tenes), modernisation of infrastructure to handle container traffic (extension and upgrading of terminals in Oran, Tenes, Arzew and Skikda) and creation of new harbour capacity in central coastal Algeria, directed primarily at container traffic. Public Private Partnerships (PPP) at port and airport facilities will be needed.

Equipment and public works material is also a very dynamic market. Despite a local supplier (National Public Works Materials Company, SNVI) and high tariff protection, imports are massive. The main supplier of equipment and materials for civil works is France followed by Germany and the US.

Hydrocarbons

The energy sector is the backbone of Algeria’s economy, accounting for roughly 60 percent of budget revenues, 30 percent of GDP, and over 95 percent of export earnings. With reserves of 16 billion cubic meters of oil equivalent discovered in 1948, Algeria is the third largest oil‐producing country in Africa and twelfth in the world. Only 25 percent of initial proven oil reserves of approximately 10 billion barrels of liquid hydrocarbons are considered recoverable with available processes. Half of these recoverable crude oil reserves have already been pumped and current estimates of

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probable remaining reserves stand at more than 400 MCM. The Energy Information Administration reported that as of 2005 Algeria had 160 trillion cubic feet (Tcf) of proven natural gas reserves, eighth largest in the world.

Algeria is a major exporter of oil and gas. It is the world’s 14th largest oil exporter and it supplies some 20 percent of Europe’s natural gas. Oil production reached 1.9 million barrels/day in 2004 (about 2.5 percent of world production) and marketed gas production stood at 225 MCM/day (about 3 percent of world production).

The hydrocarbons sector has been open to foreign participation for almost 20 years. In 2004, foreign partners accounted for slightly less than half of Algeria’s crude oil output, 14 percent for gas. However, foreign investors are required to work in partnership with the State‐owned hydrocarbon company Sonatrach. The complex contractual arrangements imposed by law increasingly have hampered financing of Algeria’s investment needs in the upstream hydrocarbon sector, estimated at US$ 70 billion for the period 2005–2015. In March 2005 Parliament adopted a new law, which promotes a more liberal operating environment, including:

Simplifying the contractual framework for upstream activities (exploration, production) and introducing free entry for foreign operators in transportation and downstream activities;

Replacing the existing production‐sharing regime with a system of taxes and royalties;

Establishing investors’ rights and obligations, including Sonatrach; and

Creating a regulatory agency to tender upstream contracts, set baseline gas prices, and collect royalties and taxes; and another to issue permits for downstream activities.

This law should lead to more upstream investment, through foreign investment and by freeing Sonatrach from the obligation of owning and operating all oil and gas infrastructure, financing new pipelines, and fulfilling non‐commercial roles such as regulation, tendering, and taxes and royalty management.

An ambitious development policy in the field of hydrocarbons has contributed to the creation of a solid economic base and major petrochemical, chemical and plastic industries. The national company SONATRACH maintains its monopoly on hydrocarbons but has the possibility of entering into joint venture contracts for upstream and downstream activities. Investment in the sector is growing.

Two gas pipelines connect the Sahara to Europe. The first Trans Tunisian Pipeline Company (TTPC) pipeline crosses the Mediterranean from Algeria to Sicily through Tunisia and the second goes through Morocco to Spain. Sonatrach’s network covers some 13,000 km, involving 14 oil pipelines and 11 gas pipelines. Transport capacity for Sonatrach’s pipeline network in North Africa is about 101.32 billion m3 of gas, 12.52 million tons of LPG and 79.44 million tons of oil (crude oil and condensate).

In 2005, the Italian oil company ENI and Sonatrach have reached the agreement for the expansion of the Trans Tunisian Pipeline Company. The agreement sets the increase up to 3.2 billion cubic metres of annual transport capacity starting from 2008 and up to further 3.3 annual billion cubic metres starting from 2012. The investment for the expansion of the TTPC pipeline amounts to 330 million Euros and will be entirely financed by ENI.

Electricity

Reforms in the power sector are defined in the 2002 electricity law, which allows private sector investment and competition, unbundling of this national utility, creation of a separate company

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for system operations and subsidiaries for generation/ transmission/ distribution of gas and electricity, and creation of a regulatory agency the Electricity and Gas Regulatory Commission (CREG) to oversee the newly‐opened industry and to ensure non‐discriminatory access to the sector.

Electricity transmission remains a state monopoly, managed by Sonelgaz. The new law enables initial initiatives by independent power producers (IPP) and creation of the Algerian Energy Company (AEC) in a 50/50 partnership between Sonatrach and Sonelgaz. This subsidiary company manages energy and water desalination projects by opening them to international private investors. Algerian law requires that all foreign operators establish joint ventures with AEC, and in return, AEC guarantees that it will purchase all electricity generated by these plants.

Since the opening of the sector in 2002, there has been considerable private investment in new electricity generating capacity. AEC contracted with Anadarko and General Electric to build the countryʹs first privately‐financed gas power plant at Hassi Berkine. In August 2003, the French company Alstom agreed to build a 300‐MW power plant at FʹKirina, 300 miles east of Algiers (US$ 5,7 billion). Canadaʹs SNC‐Lavalin won a contract to design and build an 825‐MW combined cycle power plant in Skikda, expected to begin operations in the third quarter of 2005. SNC‐Lavalin also won a tender to build a 1200‐MW combined cycle power plant in Tipasa, west of Algiers. In early 2005, Siemens announced that it would build a 500‐MW, gas‐fired plant in Berrouaghia, which should be operational by the end of 2006.The need to supply power to desalination plants has driven a large part of foreign investment in gas‐fired power plants in Algeria. The U.S.‐based Black and Veatch began construction of a facility near the Arzew oil export terminal, with a generating capacity of 310 MW and desalination capacity of 3.1 million cubic feet per day (cf/d); and Japanʹs Mitsui and U.S.‐based Ionics won a tender for a 7.1‐million‐cf/d

desalination plant near a 400‐MW power plant in Hamma, near Algiers.

In spite of the interconnection of all power plants in Northern Algeria (95 percent powered by gas), the current rate of capacity reserves is only 10 percent, largely insufficient to meet the country’s needs. The national operator Sonelgaz (which recently became a joint stock company) has set the objective of reaching a rate of reserve of some 15 to 20 percent. To face the growing demand for electricity (+7 percent per year over the period 2002‐2011), ten new power stations will be created by 2010. Sonelgaz has worked out a US$ 12.2 billion programme, with US$ 5.4 billion earmarked for production of electricity (power stations construction), the remainder for transport and distribution.

In July 2002, Sonatrach and Sonelgaz formed a joint venture, New Energy Algeria (NEAL), to pursue the development of alternative electricity sources, including solar, wind, and biomass. One project reportedly under consideration is a 120‐megawatt (MW), hybrid gas/solar power plant near Timimoun. In January 2003, Algeria and the International Energy Agency agreed on technological cooperation in developing solar power. Overall, Algeria hopes to increase the share of solar in the countryʹs electricity mix to 5 percent by 2010.

In the mining sector, Algeria has an excellent but untapped geological potential. There is a wide range of underground minerals such as phosphates, iron ore, zinc, uranium, gold, tungsten, diamonds, and precious stones. Overall, more than thirty resources can be extracted. Algeriaʹs major mining operations include the 3 million ounce Tirek Amesmessa gold mine; the 2,400 million ton Djebel Onk phosphate mine; the 5,000 million ton Quenza and Bou Khrada iron ore mines; plus several industrial mineral mines producing salt, bentonite and barite.

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A new mining law, Law 01‐10 of 3 July 2001, has been adopted, which encourages private investment. This law covers geological infrastructure, research and exploitation of mineral and fossil substances and provides for a special tax system for mining companies.

Following an international tender, the majority of assets belonging to the state owned gold exploration and mining company (ENOR) were sold to the Australian‐based Gold Mine of Algeria (GMA). The feasibility study is being finalised and gold exploration and exploitation will start soon. The Australian company in turn will provide transfer of technology and know‐how to its new partner ENOR. The main gold producing facility is the Tirek Amesmessa gold mine.

213 licences and 11 mining areas have been allotted to the private sector since 2001. Indeed, the government’s willingness to develop the mining industry makes Algeria a prospective target for the international mining community and the new mining activity opens up many prospects for international suppliers of equipment in the fields of drilling, transport, handling, mechanical shovels, pumps, power generating units, etc.

Health care and medical supplies & services

The Algerian health system continues to suffer from multiple problems, is short of financing and needs to align to the country’s changing circumstances (medical, epidemiological, demographic and economic). The population’s medical needs are considerable. National production is insufficient to meet needs and so Algeria is a major importer of drugs. The market for pharmaceutical products is estimated at more than EUR 700 million per year, of which 80 percent are imported.

Difficulties in the public health system have spawned private sector involvement. State‐owned establishments are being

rehabilitated/built and private clinics, doctors’ offices and radiology centres set up. Some 102 private clinics were operational in 2002, 125 more private clinics are being built and 45 projects are under study. New health mapping at the Ministry of Health is determining plans to build three private 250 to 500‐bed hospitals for the treatment of serious diseases.

In spite of the various measures taken by the Algerian government (requirement to produce, suspension of imports, etc.), the level of local pharmaceutical production is low, as is the number of manufacturers (just 34 in 2003). Moreover, production concerns mainly products with low technological content. However, local production is likely to increase thanks to new private investment initiatives.

Both the main international laboratories working in Algeria and national authorities would like to develop a major national pharmaceutical industry under partnership and licensing arrangements. Partnership with foreign laboratories would allow transfer of know‐how, guarantee quality, and save foreign currency as well as create future prospects for exporting a portion of local production.

In spite of certain legal obstacles, the Algerian market for pharmaceutical products remains attractive to foreign laboratories because of the country’s large population, high per‐capita consumption of pharmaceuticals, progressive scaling down of customs duties, and attractive incentives offered to foreign investors, etc.

Tourism

Algeria has major but untapped potential for tourism:

It is a large country (nearly 2.5 million km2);

It has a unique geographical location;

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There is a 1,200 km coastline on the Mediterranean;

There is an extensive network of airport and road infrastructure;

Desert covers nearly 80 percent of the country.

Nevertheless, this potential, largely unexploited except in the South, suffers from a deficit in terms of accommodation capacity, hotel structure, and quality of services/skilled labour.

Concerning hotel infrastructure, the country has 92,000 beds of which 36,000 are owned by the public sector. There is a serious deficit in terms of accommodation for international customers: businessmen, conventions, tourists … There are only two foreign investors in tourism, the Accor group with “Sofitel” and “Mercury” hotels in Algiers and the American group “Starwood” with two “Sheraton” hotels in Algiers and Oran.

The government has targeted 174 zones for expansion of tourism throughout the country, providing national and foreign investors with opportunities to launch initiatives in urban, rural, sea resort, mountain or Saharan settings. Development strategy and investment opportunities to be launched by 2013 target:

3 million tourists a year, of whom nearly 2 million would be foreigners (up from 1.234 million tourists in 2004 including 369,000 foreigners);

Investment of over DZ 232 billion;

An increase in accommodation capacity from 92,000 to 187,000 beds;

230,000 new jobs.

The Ministry of Tourism has launched a long‐term development strategy for the period up to 2013, aiming at developing the potential of natural and cultural heritage sites, improving the quality of services and Algeria’s image as a tourism destination,

and rehabilitating hotel and tourism establishments. In addition, the government has launched privatisation procedures for a number of hotels belonging to the Tourism and Hotel Company “GESTOUR” and SGP “Société de Gestion des Participations de l’Etat”. The list of hotels to be privatised can be found on the Ministry of Holdings and Investment Promotion website: www.mdppi.dz

Several international groups have announced their intention to invest in this sector, such as:

Starwood Hotels and Resorts, for the construction of a “Westin” hotel in Algiers;

Accor, in association with the Mehri group, for the construction of 36 hotels;

Marriott, for the construction of a hotel near the Sheraton in Algiers;

The Eddar‐Sidar Group, to set up tourist resorts in Algiers and Boumerdes, at a total cost of US$ 300 million and capacity of 25,000 beds;

The Al Hamed Group, for a tourism initiative budgeted at US$ 90 million on the coast of Algiers;

The US tourist group Panorama announced its intention to invest US$ 500 million in the region of El Aouana near the city of Jijel to build a tourist resort.

It should be noted that a new law regulating the development of tourism was recently promulgated, granting incentives such as 10‐year tax exemptions.

The improvement of security issues and the current economic boom will help in developing national and international investment in Algerian tourism over the medium and long term. Growing tourism in southern Algeria, the return of international

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airlines (Air France, Eagle Azure, British Airways, Alitalia, Lufthansa, Qatar Airways), the opening of a new international airport in Algiers in 2006 and declaration of investment intentions by major hotel groups indicate a healthy future for the sector.

Success Story: Orascom, 10 million subscribers in Algeria In July 2001 Orascom Telecom Holding (OTH) won for US$ 737 million the competition for the second mobile telephone licence in Algeria after a tough battle with some of the biggest companies in the world. OTH belongs to the Egyptian group Orascom, the property of the Sawiris family. This holding claims to be the largest GSM operator in Africa, the Middle East and the Indian subcontinent. Alongside France Télécom (Orange) it co‐operates MobiNil in Egypt. On 15th February 2002, Orascom Algérie officially launched its activities under the brand name Djezzy GSM. The 48 main towns of the wilayas (Departments), the most distant being Tindouf and Tamanrasset, were covered at the end of 2003. After having reached the symbolic figure of one million subscribers in September 2003, Djezzy’s growth accelerated, with two million subscribers in July 2004, three in December 2004, 4 in March 2005 and 6 million at the end of September 2005. In only 5 years, Orascom secured an outstanding leadership on the Algerian mobile market, reaching the threshold of 10 million subscribers in September 2006 (a 50% market share by the number of subscribers, and 70% of the sector’s total sales figures), according to the National Authority for the Regulation of the Post and Telecommunications (ARPT in French). As of June 2006, Djezzy represented 39% of OTH’s total sales figures, making it Orascom Telecom’s most significant and profitable subsidiary. As a consequence, the Egyptian parent

company increased its participation all along 2006 until owning 96.8% of the capital at the end of 2006. Cevital SPA, Algeria’s first agro‐food company, holds the remaining shares. This success has not, however, been achieved without hitches. Since the opening of the market, a severe price war has raged between Orascom and Algérie Télécom (AT), the historic operator, through its mobile subsidiary Mobilis, while competition further increased with the launching of Nedjma, a third operator, by Kuwait’s Wataniya Telecom in August 2004. Orascom’s success seems to be at present a cause of worry for the ARPT which, in Decision n°11 on March 12, 2007, forced Djezzy to withdraw its cheapest offers, in the name of preserving competition.

Overview

References

Capital Cairo Surface area 1,002,000 km2 Population 78,887 million inhabitants (July 2006) Languages spoken Arabic is the official language, English is

widely spoken in business circles & sometimes French

GNP (US$) US$ 109 bn (2005‐06) GNP/per capita (dollars)

US$ 1,381 (4,200 in ppp.) in 2005‐06

Religion The Majority are Muslim, most of the remainder are Copts

National days 25th April (Sinai liberation day) 18th June (Evacuation day) 23rd July (revolution of 1952 day) 6th October (Armed Forces day)

Currency (March 2007) Egyptian Pound (EGP) 1 Euro = 7.71 EGP ‐ 1US$ = 5.77 EGP

Association agreement with EU

Signed on 25/06/2001; implemented since 1/06/2004 EU web site: http://www.eu‐delegation.org.eg/

WTO membership Member since 1995 Sources: IMF, Article IV 2005, Country Report n°5/177 and World Development Indicators 2006. Fiscal year starts 1st of July

Economic profile

Egyptʹs prominent role in geopolitics stems from its strategic location, with the Suez Canal (“the vital route”) connecting the Red Sea to the Mediterranean. Egypt has historically been a peacemaker in the region, thanks to its undeniable influence in the Arab world and the size of its population, the sixteenth most populous country worldwide with almost 79 million people.

Egypt has embarked on major economic and structural reforms since 1991 and is currently in an important phase of transition from a centralised to a market‐oriented economy. After a government reshuffle in July 2004, the new team has sought to accelerate trade and financial liberalisation and broaden economic and structural reforms. Substantial progress was made in 2005 in the areas of tax reform, management of public finance, monetary policy, privatisation, and restructuring of the financial sector.

Egyptʹs GDP growth rate slowed between 2000 and 2003, averaging only around 3.5 percent per year, mainly because of external shocks such as security‐related events, the aftermath of the September 11th attacks, and the war in Iraq. However, worldwide recovery and devaluation of the Egyptian pound enabled the country to reach a higher growth rate of 4.1 percent in 2004, 4.5 percent in 2005 and estimates for 2006 close to 6 percent (according to the CIA/EIU), stimulated by greater demand in the tourism sector and resumption of investment. Egypt’s main revenues are generated by tourist receipts (US$ 6.4 billion in 2004‐2005), remittances from workers living abroad (US$ 4.3 billion), fees for using the Suez Canal (US$ 3.3 billion), and oil exports (US$ 1.2 billion).

Agriculture is the main economic sector, employing over 30 percent of the labour force and accounting for 14.7 percent of GDP. The oil and gas sector accounts for approximately 9 percent of GDP and over a third of Egyptʹs export of goods. The sector is very attractive to foreign investors and periodic discoveries continue to feed

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reserves and production of natural gas in Egypt. The country is working to enhance its ability to export natural gas by building gas pipelines. Egypt could thus become the sixth world exporter in 2007.

The manufacturing sector has accounted for some 20 percent of GDP in recent years, employing 14 percent of the labour force. It is quite diversified, the most important sub sectors being metallurgy and metallurgical products, food processing, chemical products, and textiles. The construction sector is booming thanks to growing regional demand and devaluation of the Egyptian pound.

The Government has launched an Industrial Modernisation Programme to increase the competitiveness of private enterprises. The specific objectives of the programme are to assist private enterprises in their plans for development, to strengthen business associations and the Ministry responsible for industry, and to improve the industrial sector’s policy framework. The total budget for this program is 430 million EUR, of which 250 million come from the EU.

The services sector accounts for about half of GDP, with fees from the Suez Canal and tourist receipts being the main components as well as major generators of foreign exchange. Despite uncertain conditions in the region, there were more than 6 million tourists in 2004 and tourism receipts remained strong at US$ 4.6 billion.

Foreign trade plays an important role in the Egyptian economy, with exported goods and services leading the current wave of economic recovery. The country has registered a strong increase in proceeds from exported merchandise since the devaluation of the national currency in 2003‐04.

Egyptʹs main exports of goods are fuel products, manufactured goods, and agricultural products, mainly cotton. The share of textile exports has declined progressively, from 16.6 percent in 1995 to 4.5 percent in 2003. Egypt imports the vast majority of its

consumer goods and capital equipment (machinery and transport equipment) as well as chemicals. About 14 percent of imports are purchased for activities at Egypt’s free trade zone.

The European Union is the main supplier (40 percent of total imports), followed by the US, (14 percent). The EU’s main imports from Egypt are energy (42 percent), textiles and clothing (16 percent), agricultural products (10 percent) and chemicals (6 percent). Trade with Arab countries has been growing, up from 10 to 13 percent of total.

Egypt is promoting preferential agreements with its trading partners. The Association Agreement with the European Union (in the framework of the Barcelona process), signed in June 2001, came into effect on June 1st 2004, the main objective being the establishment of a Euro‐Mediterranean free trade area by 2010. The first phase of this agreement provides Egyptian exporters with free access to the European market for industrial and agricultural goods that do not compete with European products. Inversely, customs duty on imports originating from the EU is to be phased out over 15 years, according to four product lists annexed to the agreement. Imports of raw materials and industrial products will be completely liberalised by 2007, semi‐finished products by 2010, consumer goods by 2013 and import of cars by 2016.

A free trade agreement has also been signed between Egypt and the USA: the Trade and Investment Framework Agreement (TIFA), providing for tax‐free and quota‐free trade of certain goods, in particular textile products. Under the auspices of the US, Egypt signed a trade protocol with Israel on the 14th of December 2004, establishing ʺqualified industrial zonesʺ (QIZ) in Egypt. Goods from these zones will qualify for duty‐free access to the United States, provided that 35 percent of their components are the product of Israeli‐Egyptian cooperation and that 11.7 percent of

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inputs come from Israel. In February 2005, 397 companies were working in QIZ, including 300 in the textile and clothing sector.

In 1998, Egypt joined the 22 members of the Arab League in the Greater Arab Free Trade Area (GAFTA). Egypt also signed a free trade agreement with Jordan, Morocco, and Tunisia in February 2004, the “Agadir Agreement”, committing to eliminate customs duty on reciprocal exchanges as of the 1st of January 2005, the intensification of economic co‐operation and the introduction of standardised customs procedures. Egypt has been part of the COMESA (Common Market for Eastern and Southern Africa) since 1998. Lastly, Egypt signed a free trade agreement with Turkey in December 2005.

In September 2003, Prime Minister Ahmed Nazif launched a comprehensive economic programme targeting macro‐economic stability, a more conducive business climate, more foreign investments and capital inflows, the development of the capital market, enhanced exports, and the promotion of private sector involvement.

The programme includes the resumption of the privatisation programme (22 companies have already been privatised between July 2004 and April 2005 generating receipts of 3.3 billion pounds, ‐ some 1.45 billion Euros) and the acceleration of structural reforms (in particular in the banking environment). They include the absorption of six small banks by their respective parent companies, the opening of capital in joint venture banks’ capital to private investors and the privatisation in 2006 of the “Bank of Alexandria”, one of the four largest public banks that dominate the market (sold for 2 billion USD to the Bank of Sao Paolo in October). Restructuring of the banking portfolios to write off non‐performing debt related to State‐owned enterprises is under way. In the insurance sector, the plan is to increase the private sector involvement by privatising one of the four state‐owned insurance

companies. Other measures are under way to develop the mortgage market, to expand the capital market and to reinforce the regulation and supervision of the financial markets.

Over the first nine months of 2005/06, 49 state assets were sold for a total of US$2.5 billion, including 7 joint venture banks and 20 percent of the government’s stake in Egypt Telecom. As of March 2007, 99 entities were listed for sale by the government: 44 companies (or holdings in companies) and 55 joint ventures (www.investment.gov.eg).

As part of an ongoing overhaul of the tax regime, a new customs As part of an ongoing overhaul of the tax regime, a new customs tariff was adopted in 2004 to conform to WTO rules simplifying tariff structure and reducing the weighted average tariff rate from 14 to 9.1 percent. The majority of taxes on exports and imports have been removed and customs formalities simplified. Several income tax laws were passed in 2005, reducing the top marginal tax rates on income and profits from 32 to 20 percent for individuals and from 40 to 20 percent for corporations and partnerships. The reform increased the exemption threshold, provided for more generous depreciation allowances, broadened the tax base by eliminating deductions, and provided for the phasing out of tax exemptions. Moreover the country implemented procedures of automatic tax collection.

Finally, Egypt introduced an interbank foreign exchange market in 2003, which has helped to scale down the parallel market.

Egypt has remained an important recipient of foreign direct investment (FDI), with inflows rising sharply from US$400 million to US$700 million. The European Union has been the major foreign investor in Egypt, followed by the United States. Investor confidence in economic policy remains high. In March 2007, the country announced it intended to triple their industrial FDI within the year, from 3 to 9 billion USD. The authorities hope indeed that

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progress on reform and improvement of the business environment (such as the 2004 tariff cuts, tax reforms, and additional privatisation) will continue to further boost foreign investment.

Country risk

For Coface (January 2007), petrodollars benefit to major hydrocarbon exporting countries, but also the others economies of the region via foreign investments and workers’ remittances. But the geopolitical instability of the region as well as governance and business environment weaknesses negatively affect the rating, e. g. in Egypt (rated B).

For EIU, Egypt should be able to repay its debt, due to external account surpluses and rising forex reserves but the high fiscal deficit is a concern (more than inflation trend). EIU provided the following estimate of the main country risks as of September 2006 (AAA=least risky, D=most risky): Sovereign risk, B; Currency risk, BBB; Banking sector risk, BB; Political risk, B; Economic structure risk, B.

Key challenges

In spite of the major reforms already under way, the challenges involved in building a more dynamic private sector remain considerable.

Economic growth over the past few years has not been high enough to reduce unemployment (estimated at 10 percent) and absorb new job seekers (500, 000 to 700,000 each year).

The overall government deficit continues to be high and total domestic debt amounted to 98.7 percent of GDP in 2003‐04 and 82.9 percent of GDP as of the end of September 2005 (some US$ 29.7 billion). This high level of internal debt is a constraint to securing the funding required to build the infrastructure base Egypt needs for future growth.

The investment rate (16‐18 percent of GDP) remains weak in comparison to the country’s development needs.

Tourism brings in income that is crucial to the current balance and economic activity, but the sector is endangered by the threat of terrorism.

Strong points

Egypt has an abundant, competitive labour force.

It has diversified sources of income: fees from the Suez Canal, tourism, private transfers, and remittances, gas and oil exports.

Foreign‐exchange reserves are at a comfortable level and foreign debt remains moderate.

The country’s strategic location as a gateway to Africa and the Middle East and as a regional mediator ensures the political and financial support of Western countries.

Structural reforms have been introduced aiming in particular at streamlining bureaucratic procedures for investments and tackling impediments to higher growth, promoting the privatisation programme, improving the business climate, and introducing numerous investment incentives targeting upgrading of the business environment and modernisation of the economy.

New natural gas reserves were recently discovered in the Mediterranean and this resource could become the “engine” of the hydrocarbons sector in the next ten years. In 2003, Egypt started to export its gas to Jordan through an underwater gas pipeline connecting Taba to the Jordanian port of Aqaba.

Egypt has become an important recipient of foreign direct investment (FDI) in the last few years, with considerable increases (almost US$ 10 bn in 2005‐2006, up from less than one billion in early 2000s), according to Central Bank of Egypt

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statistics. FDI can be either direct or through joint ventures, in the oil sector, cement industry, pharmaceuticals, automotive engineering but also tourism, real estate and telecommunications.

The country’s international profile has improved thanks to legislation encouraging foreign investments, the possibility of repatriating invested capital and profits, tariff cuts, corporate tax reform, promotion of exports, creation of special economic free trade zones and protection of intellectual property. It is hoped that further privatisation will lead to a further increase in foreign investment in Egypt.

The General Authority for Free Zones and Investment (GAFI)

The investment in general, including in the free zones, be it of national or foreign origin, is managed by the General Authority for Free Zones and Investment (GAFI), which was gradually transformed into an agency of investment promotion and facilitation. The law 13‐2004, modifying the law 8‐1997, aims at facilitating the establishment of new companies, by making the GAFI a one stop shop for the investors. This law also entitles the GAFI to grant temporary licences for the launching of a project and to act on behalf of the investors and of the official organisations throughout the life of an investment project.

The GAFI established a one‐stop‐shop including representatives from the various government agencies in charge of administrative procedures related to foreign investments. A new company can thus be created within 72 hours.

The GAFI acts as a national focal point for the international organisations, the business community and the international trade poles, by disseminating information and investment opportunities through its modernised centre of information. It is organising national and international seminars on these questions.

Co‐operating with the Ministry of Investments, the GAFI established a national cartography of the investment opportunities to be promoted for each area and launched in September 2005 an international campaign of promotion and communication with the assistance Fleishman‐Hillard communication agency.

The GAFI plays an essential role in technology transfers and active promotion of the Egyptian exports towards the rest of the world.

Web site: http://www.gafi.gov.eg/

How to invest in Egypt? While Egypt has no specific legislation governing foreign direct investment, most foreign investment takes place under the terms of Investment Guarantees and Incentives Law n°8‐1997, which defines incentives for investment in certain activities and by laws 162‐2000, 13‐2002 and 13‐2004, and law 83‐2002 on the special economic zones. The incentives include tax breaks, reduced tariffs on imported inputs, and guarantees against confiscation. Foreign investment is managed by the General Authority for Foreign Investment and Free Zones (GAFI), whose role has gradually shifted from investment regulation to investment promotion and facilitation. The government is currently working on a detailed program for fast tracking and streamlining bureaucratic procedures for investments, with the aim of upgrading the business environment and introducing further deregulation

Foreign companies can invest either in the framework of corporate law or legislation governing investment guarantees and incentives, depending on the advantages they wish to obtain and the field of activity.

Corporate law introduces a number of investment incentives, including tax exemptions of up to 50 percent on income earned from shares registered on the stock exchange. The Investment

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Guarantees and Incentives Law passed in May 1997 covers investment through joint ventures, limited liability companies and partnerships and governs ʺinland investmentsʺ, essentially domestic investment projects and investment in free zones, which are treated as being outside the domestic economy for purposes of taxation, customs and trade.

Unlike corporate law, which applies to all categories of investment, the Investment Guarantees and Incentives Law applies to investment (domestic or foreign) in certain specified activities or sectors, such as air transportation and related services, animal, poultry and fish farming, financial leasing, hospital and medical centres, hotels, tourist villages, tourist travel and transportation, certain housing projects, industry and mining, infrastructure relating to drinking water, sewage, electricity, roads, and communications services, oil services in support of exploration and the transport and delivery of natural gas, overseas maritime transport, production of computer software and systems, venture capital…

Investment incentives under the Investment Guarantees and Incentives Law include tax exemptions on company profits, personal income tax on dividends, and annual stamp duty on capital. Tax exemptions are granted for five years for all investments, up to ten years for companies established in new industrial zones, new urban communities, or remote areas, and up to 20 years from the date of establishment for investments outside the Old Valley. In addition, all customs duty on import of capital by companies registered under this law are reduced to 5 percent. In addition to tax breaks, investors receive guarantees against confiscation, immunity from administrative sequestration, and the right to import and export inputs and final products without having to use agents and export licenses.

The Government of Egypt has been promoting free trade zones since 1974. Incentives for doing business in free zones are meant primarily to attract investment, to provide employment for Egyptians, and to encourage exports. Law 83/2002 provides for the establishment of special economic zones. In particular, the law provides for a special customs system with simple and efficient procedures, tariff‐free import of inputs and equipment, a special taxation system with lower rates, and a special regime for labour relations. There are no restrictions on the type of investment activities that are eligible. There are 7 public free zones and 39 private zones.

Foreign exchange controls were abolished in 1991 and there are no restrictions on repatriation of funds by companies or rules requiring foreign companies to hold foreign currency accounts.

In addition, Egypt has adopted a law on intellectual property rights and new legislation on money laundering. A new law governing competition is also in force.

Egypt has been very active in negotiating bilateral agreements, signing more than 50 agreements with a number of countries relating to investment protection, in particular most of the member states of the European Union and the United States.

Egyptian corporate law is covered by law n°159‐1981 governing companies and its application decree n°96‐82, by investment law n° 8‐97 and application decree n°1247‐2004. The most common legal forms are joint stock and limited liability companies. Some companies (insurance companies, banks, public companies, leasing companies, etc.) are ruled by specific laws. The law also allows foreign companies to set up representational, technical, and scientific or other offices, but they cannot carry out a commercial activity unless they have a local representative who is an Egyptian national.

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Finance & banking in Egypt A new banking law (law n°88‐2003 of 15 June 2003) has unified all Egyptian banking regulations. It was enacted in accordance with the international prudential standards of the Basle II agreements and contributes to strengthening the Egyptian banking structure by improving prudential ratios and governance rules.

The new law certainly catalysed mergers and acquisitions given that it forced banks to meet new minimum capital requirements by July 2005. Moreover, the new law abolished the distinction between commercial, business, and specialised banks. Initial capital is now EGP 500 million minimum for a bank and the capital adequacy ratio is at least 10 percent. For foreign bank branches, the minimum capital requirement is US$ 50 million or equivalent in a convertible currency.

Also under way are a restructuring plan for liabilities (non recoverable loans) and bank recapitalisation, with the financial and technical assistance of international donors. Another recent modernisation effort is the introduction of free flotation of the national currency vis‐à‐vis the dollar.

The Central Bank of Egypt (CBE) is responsible for supervision, control, and regulation of the banking sector and for issuing licences. The country’s banking network is relatively dense and currently counts 53 banks: 27 commercial banks (of which three are State owned) with 1375 branches, 23 investment banks (including 12 foreign branch banks) and 3 specialised banks.

The banking system (excluding the CBE) is dominated by the three state‐owned commercial banks, the Misr Bank, the National Bank of Egypt (NBE), the Bank of Cairo, plus the recently privatised Bank of Alexandria. These four banks accounted for some 60 percent of banking assets in 2003.

Foreign banks can open representational offices in Egypt, with activity limited to market analysis and identification of investment possibilities. There are 26 representational offices of foreign banks currently operating in Egypt. Subsidiary companies of foreign banks are mainly Arab and European (BARCLAYS, HSBC, Credit Lyonnais, BNP and GP). And the Natexis Bank has a representational office.

In November 2004, there were 21 insurance companies, 614 private pension funds, 3 State‐owned insurance funds, and 5 insurance consortia.

Gross premiums of Egyptʹs insurance companies amounted to EGP 4,036 million in 2003/04. The Government has sold its majority shares in two companies to foreign investors. Four insurance companies (three direct insurance companies and Egyptʹs only reinsurance company) remain state‐owned, their combined market share in 2003/04 exceeding 70 percent. Authorities had indicated that privatisation was initially planned for mid 2006, following valuation (completed) and restructuring.

The legal framework for Egyptʹs insurance sector is laid down in legislation governing insurance activities (law 10/1981, amended by law 156/1998), which allows up to 100 percent of foreign ownership in Egyptian insurance companies. It also allows foreign companies to establish representational offices to advertise and promote life and other kinds of insurance. However, they may not sell their services through representational offices. Minimum capital required for incorporating an insurance company is EGP 30 million. State‐owned insurance companies are also being restructured, with a view to privatisation.

The Cairo and Alexandria Stock Exchange (CASE) is Egyptʹs major stock market, one of 2005’s top performers. After stabilisation of the sector, more than 744 companies were listed in 2005 (vs. 1110 in 2001) but with higher market capitalisation (EGP 235 billion vs. 11.3

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billion in 2001), driven by privatisation of a number of banks, the sale of public shares in some State owned companies, such as Sidpec (petrochemicals) and Amoc, Egypt Telecom (20 percent of shares) and the oil company MIDOR, which led the growth of the Case 30 index. Foreign holdings increased from 16 percent in 2001 to 27.5 percent in 2004 and 30 percent in 2005.

The Government has taken various measures to bring Egyptʹs capital market closer to international standards. Capital market regulation is well advanced in adopting best practices and the stock market is enforcing higher standards of corporate governance. Companies listed on the CASE are required to conform to international accounting and disclosure standards. New listing and delisting rules have been issued to eliminate less reliable companies. A new electronic trading system has been installed and the clearing/settlement system upgraded.

Lastly, the Egyptian Stock Exchange has joined the International Stock Exchange Union and signed an agreement in December 2005 with the Dow‐Jones Index in order to create the Dow‐Jones CASE Egypt Titans Index, a blue‐chip index composed of Egypt’s largest companies. This index is to be launched in 2006.

Telecommunications & internet in Egypt Egyptʹs telecommunications services have expanded rapidly in recent years, doubling the number of fixed lines (with 10.4 million subscribers currently for a penetration rate of 13 percent) and increasing 15‐fold the number of cellular subscribers (a 10 percent density), increasing ten fold the number of internet users to 5 million subscribers with a penetration rate of some 6 percent. Major investments have been made in telecom infrastructure (between US$ 800 and US$ 1200 million per year from 2000 and 2004). These performances are the fruit of liberalisation and deregulation policy

based on public‐private partnership as per the “Egypt Information Society Initiative”.

This integrated project targets development of a local ICT industry and better penetration thanks to original initiatives (free internet, low‐cost computers and community technology centres…) and development of four topics: e‐knowledge (training, education, cultural heritage, and contents), e‐health, e‐business and e‐government.

A new telecommunications law (law 10/2003) as well as a law establishing the National Telecommunications Regulatory Authority (NTRA) has been adopted. The NTRA has overall responsibility for regulating telecommunications in Egypt and is also responsible for regulation of television and radio bandwidths, including frequency usage. Telecom Egypt is a State‐owned monopoly, although the Government has announced that 44 percent of the company will be sold off to a strategic investor and additional shares on the stock exchange will be introduced as soon as market conditions are suitable. The Telecommunications Law stipulates that Telecom Egypt is to relinquish its monopoly as domestic and international fixed‐line operator by 31 December 2005 and thus basic services have been completely liberalised since then in accordance with GATS commitments. Lastly, 20 percent of shares in TE capital were opened to the public in December 2005.

Telecom Egypt has undertaken the subsidiarisation of its various activities by specific companies, mainly:

Egypt Telecom Data, a subsidiary of TE specialised in internet services;

TE IT/Masreya, the subsidiary company in charge of data‐processing support to the national operator, implementing software packages, customer relations management (CRM), invoicing and a call centre “XCEED Contact Centre”;

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Centra Technologies, which assembles PCs, especially those distributed in the framework of the programme “A Computer for All”;

Watanya, which holds 51 percent of capital in the cellular operator Vodafone Egypt.

In addition, Egypt launched a policy of regional expansion, following awarding to Telecom Egypt and Orascom Telecom in 2005 of the second licence for Algerian fixed telephony, worth US$ 65 million and running for 15 years. Orascom. President Naguib Sawiris has also been the initiator of the Weather Holding, which holds the majority of Orascom and purchased the Italian mobile operator Wind at the end of 2005, in partnership with IPE investment fund and Wilbur Ross.

There are currently over 14 million subscribers to Te‐Vodafone and ECMS‐MobiNil, the two mobile phone operators compared to 4.3 million at the end of 2002.

A third GSM licence was cancelled but another tender is still in the pipeline.

A 3G licence will be granted at the end of the period of exclusivity granted to the two current operators (end 2007). To support its continuous liberalisation of the Telecom Services market and promote competition, Egypt by introduced a wide‐scale unbundling of local loops for ADSL services as part of the broadband initiative launched in May 2004.

There are plenty of internet shops, especially in Cairo. The country counts nearly 160 internet service providers. A new law on electronic signatures (law 15/2004) has been adopted, regulating commercial transactions by internet. This law seeks to encourage the use of information technologies and provides the same legal recognition and protection to electronic contracts that already apply to traditional contracts. It should be noted that Egypt has the

lowest rates in the Middle East, but only 3 percent of the population had a computer in 2004. The data processing sector, however, registered an average growth rate of between 15 and 20 percent per annum.

Development of infrastructure to support fixed and mobile telecommunications presents many opportunities in terms of equipment, for both companies and private individuals. Local production of telecom equipment is carried out by two companies ‐ NTC and EGTI, subsidiaries of Siemens and Telecom Egypt ‐ that assemble a number of licensed products (equipment for exchanges, PABX, terminals…).

Local companies produce copper cables and there is a manufacturer of optic fibre cables. However, production is not high enough to meet local demand, 80 percent of which being therefore be covered by imports.

There are several foreign companies working in Egyptian telecommunications infrastructure: Alcatel, Siemens, Lucent, Ericsson, Nortel Networks, Motorola, Nokia, Nec… Chinese companies are also present, in particular Huawei and ZTE.

Egypt has launched the “SMART Village”, which provides a high tech environment for IT and Telecom companies. This initiative targets fields of technology in which Egypt is capable of becoming a leader: the data‐processing industry, software development and ICT research but also call centres with companies like Exceed or Raya, already installed on the site. In addition to the many services it offers, the SMART Village expects to convince investors thanks to Egypt’s skilled, low cost workforce. ICT projects can move ahead on site thanks to the business incubator Ideavelopers (www.ideavelopers.com) and the tech trust fund Technology Development Fund (http://www.techdevfund.com).

Aside from ICT companies, the SMART Village will soon accommodate within a financial pole the Cairo Stock Exchange

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(CASE) and a number of banks and financial institutions. Several ministries have also chosen to relocate there: the Ministry of Information, Telecommunications and Technology, the Ministry of Foreign Trade, and the Ministry of Tourism. Alcatel, Microsoft, Vodaphone, Telecom Egypt, and Motorola are already installed at the site and several others are in negotiations. Foreign companies setting up at SMART Village are eligible for the incentives provided for in investment law n°8, in particular a 10‐year exemption from tax and the right to repatriate profits.

Business and investment opportunities in Egypt Since launching of the privatisation programme in 1991, the government has moved ahead with 196 sales out of the 314 originally slated for privatisation. The new Ministry of Investment, responsible for managing State‐owned companies, announced an initial list of companies to be privatised over the period 2004‐2007 in the following sectors: spinning mill and cotton weaving, trade, metallurgical industries, chemical industries, food industries, housing, tourism and cinemas, maritime and river transport, and ten other companies in various sectors.

Thanks to its strategic location in the Middle East and investment incentives available in particular for activities based in free zones and special economic zones, Egypt is used as a platform for re‐export to the Middle East, the Maghreb and African countries. Moreover, the QIZ agreement makes the country attractive for investors targeting the US. For exporters interested in the Egyptian market, the main opportunities are in equipment, machinery and environmental services, information technology and telecommunications, pharmaceutical products and medical equipment, equipment for oil exploration, hotel accommodation and restaurants, food processing, plastic industries, architecture and construction, agricultural machinery, packaging, franchising,

retailing, electrical power systems, building materials, components and automotive spare parts…

In addition, Egypt wants to increase its exports of non‐traditional products and to promote foreign investment in new branches like furniture manufacturing, leather transformation, chemical industries, glassmaking, paper mills and shipbuilding. It is also expected that public‐private partnerships will be actively sought in sectors such as transportation, telecommunications, tourism and real estate development.

The Ministry of Investment in coordination with other ministries has successfully created a dynamic database on investment opportunities available in the various sectors of Egypt’s economy. More details on these opportunities are available on the Ministry of Investment’s portal: http://www.investment.gov.eg

Construction and public works

Policy promoting public works is a top priority, offering several opportunities in many fields, e.g. activities relating to infrastructure projects (a new channel in the Tochka Delta in the Sinai, new cities), activities in the energy sector such as construction of power stations, development of gas production (greater reserves, plants to produce liquefied natural gas) as well as oil activities. Taking into account the size of the country and its needs, Egypt is and will remain an active consumer of infrastructure projects. Upstream, the needs in consulting, engineering, market studies and modelling are considerable. On the other hand, building contractors and experts will be sought to manage equipment and supply added value services during the implementation phase.

Transport

In the framework of a new global transport policy, a number of major projects have been planned. Among the essential axes of this policy, civil aviation is a most promising sector for foreign

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companies, with the government seeking to make Cairo the new A major undertaking is the new regional airport of Alexandria/Borg El Arab, along with rehabilitation/development/upgrading of the country’s airport platforms, and divestment of 20 percent in the national carrier Egyptair and its subsidiary companies in the stock exchange at the beginning of 2006. Worsening traffic conditions in the capital have led authorities to take up plans once again for Cairo’s third subway line, which had been put aside because of its cost. Work was scheduled to begin in October 2006.

Some 25 companies and 11 engineering departments are involved in the implementation of five initiatives (road signs, civil engineering, electromechanical works, railways and moving cargo & equipment), along with two other procurement actions relating to analysis of bids and project supervision.

Furthermore, rights to bus lines are being granted to private operators. Given the sizeable financing requirements for harbour infrastructure, authorities are increasingly resorting to public‐private partnerships. To improve the performance of public transport services, the government has transformed the department in charge of development at the Egyptian railroad into a private investment company, the Egyptian Railway Projects & Transport Co. (ERPT), which can grant build‐operate‐transfer (BOT) contracts for up to 25 years to encourage private investors to develop land.

Hydrocarbons

The oil and gas sector accounts for 8 percent of GDP and 40 percent of Egyptian exports. Natural gas is by far the major element in petrochemicals production and the abundance of Egyptʹs natural gas reserves gives it a competitive advantage. Production has increased by 75 percent over the past five years, reaching 3.3 billion cubic feet per day by the end of 2003‐04, whereas proven natural gas reserves have reached 62 trillion cubic feet (tcf), with probable reserves estimated at 120 tcf. Two factories have been set up to

produce liquefied natural gas (LNG) and export of gas has grown thanks to an expanded fleet of tankers to transport LNG, decreasing transportation and infrastructure costs and thus opening up developing markets. Initiatives include the Egyptian‐Mediterranean project to export liquefied natural gas (LNG) to Jordan, Syria and Lebanon through extended pipelines and Damiettaʹs complex to ship LNG to Spain and Italy. Egypt has recently become the worldʹs seventh largest exporter of liquefied natural gas.

As a result, the natural gas sub sector has been expanding rapidly and the government is trying to diversify gas consumption in Egypt in order to maximise discovery potential and reduce reliance on oil supplies. Indeed, oil production is falling, down to less than 620,000 barrels per day in 2004 from more than 920,000 barrels per day in 1995. Proven oil reserves have remained stable since 2001 because of new discoveries, at a little less than 3 billion barrels.

The hydrocarbon sector is under the supervision of the Ministry of Petroleum, responsible for all issues relating to exploration, exploitation, and distribution of petroleum and natural gas in Egypt. Several public institutions are also active in the sector: the State‐owned Egyptian General Petroleum Corporation (EGPC), in charge of supervising the oil industry, exploration and marketing; the Egyptian Natural Gas Holding Company (EGAS), in charge of the gas sector; the Egyptian Petrochemicals Holding Company (ECHEM), in charge of the petrochemical industry; and Ganoub El Wadi Petroleum Company Holding, which supervises and promotes procurement procedures for concessions in southern Egypt.

The main laws governing mining, petroleum and natural gas industries are the Mining and Petroleum Law (law 66/1953), and laws 151/1956 and 86/1965.

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Nearly 50 multinational companies work in Egypt, investing more than US$ 2 billion a year: Apache, British Gas, LP‐Amoco, Deminex, TotalFina‐Elf, ENI‐Agip, Exxon‐Mobil, Marathon, Norsk Hydro, Novus, Repsol, Royal Dutch Shell, Samsung, Texaco… Tenders were launched at the beginning of 2006 for concession of 20 new blocks of oil and gas exploration. The first section of the Arab gas pipeline was inaugurated in July 2003, transporting Egyptian natural gas across 245 kilometres of the Sinai Peninsula to Aqaba in Jordan.

In January 2004, the Egyptian, Jordanian, Lebanese, and Syrian governments signed an agreement for the construction of a second 393‐kilometre section connecting Aqaba to the power station of Rihab near the border between Jordan and Syria. The gas pipeline will be extended to the Syrian port of Banias where it will be connected to the Syrian‐Lebanese gas pipeline (currently under construction) and the power station of Zahrani in Lebanon.

Egypt has two strategic arteries for the transport of hydrocarbons: the Sumed pipeline and the Suez Canal.

The Egyptian State has a total monopoly on the refining sector, with nine refineries producing total output levels of some 726,250 b/d.

Following the launching of production at MIDOR (the Middle East Oil Refinery) in 2001, total production capacity at Egyptian refineries reached 727,000 b/d. The construction of a new refinery in the area of Ain Sukhna is to begin in 2006, expected to turn out 130,000 barrels per day. In addition, the Red Sea harbour authority has signed a contract for the construction of a new refinery, which should produce 80,000 tons of organic gasoline.

Electricity and power generation

Over the past decade, coverage has been extended to all parts of the country and virtually the entire population now has access to

electricity. Installed capacity was 18.1 GW in 2004. About 86 percent of Egyptʹs generating capacity is thermal, the remainder hydroelectric. To keep up with growing demand, installation of an additional 13.4 GW by 2012 is planned, mainly through additional thermal power plants. The contribution of the electricity sector to GDP was 1.5 percent in 2003/04.

The electricity grid is connected to Jordan, Libya, and Syria (via Jordan). There are plans for a transmission line between Egypt and the Congo, through which Egypt would have access to the excess capacity generated by Congoʹs Inga Dam. Electricity supply enters Egypt duty free. Egypt is a net exporter of electricity, with 2002/03 net exports amounting to 780 GWh.

Power policy is formulated by the Ministry of Electricity and Energy. The State‐owned Egyptian Electrical Holding Company (EEHC) is responsible for the generation, transmission, and distribution of electrical energy. It also owns and operates Egyptʹs electricity grid. The transport, distribution, and management of the grid remain a monopoly controlled by the EEHC, while electricity generation has been liberalised.

Law 100/1996 authorises the private sector to build, own, operate, and transfer (BOOT) electrical power generation plants. Thus, private companies will be selling electricity to EEHC for twenty years and at the end of the operating period, they will transfer assets to EEHC. Since adoption of this law, private investment in the electricity sector has increased considerably, from EGP 120 million to EGP 5,030 million. The share of private generating companies in total installed capacity was just under 8 percent in 2003.

Health and pharmaceutical products

The Egyptian medical sector is very complex, with multiple public and private actors. The State budget devoted to health remains

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largely insufficient to ensure maintenance and renewal of the free care network. Except for a few large hospitals, the whole of the medical system suffers from a low level of equipment and quality.

To mitigate this problem, a global reform of the sector has been launched by the government, implementing the “Family Health Model”, a set of measures intended to improve quality and establish pilot health facilities called family health units (FHUs) for primary health care. The government’s approach is supported by several donors (EU, the World Bank, ADB and USAID) and it has been adopted in several pilot governorates.

The objectives of the five‐year plan 2002‐2007 are as follows: construction of new hospitals and improvement of care in rural areas; an increase in health personnel; supply of more sophisticated equipment for dispensaries; increased budget for research allocated to universities and scientific research centres; promotion of private investment in health care facilities.

With more than 72 million inhabitants, Egypt is the number one consumer and producer of pharmaceuticals in the Middle East, this sector being one of the country’s oldest strategic industries. In 2004, Egypt exported approximately US$ 43 million worth of pharmaceutical products and an increasing number of private sector companies have entered the market. The private sector dominates over three‐quarters of the local market. Egypt has the capacity to manufacture most of the drugs it needs, except for very high technology products. More than 6000 references are registered and 93 percent of needs are covered by the 74 local pharmaceutical companies. Local production covers approximately 94 percent of the domestic market and the government wants to reach self‐sufficiency in pharmaceutical products, especially for the most common products. The Egyptian market thus offers promising prospects for foreign pharmaceutical companies, in particular for

local production. There are attractive investment opportunities in therapeutic groups.

Tourism

As in other Mediterranean countries, tourism is a major contributor to the GDP, employment and investment and the largest foreign currency earner in Egypt. Along with related services, tourism represents 11 percent of GDP, generates on average a quarter of Egypt’s receipts in foreign currency and employs 2.2 million people, some 12.6 percent of the labour force. International tourist arrivals in 2004 amounted to 6 million, compared to 3.9 million in 1997, expected to reach 8 million in 2005.

Egypt offers a wide variety of attractions from its historical heritage that spans several millennia. Landmarks and monuments from Pharaonic, Nubian, Greek, Roman, Christian and Islamic civilisations are easily accessible. In addition, beach and leisure tourism on the coasts of the Red Sea and South Sinai have grown considerably in recent years. To meet higher demand, tourism accommodation capacity has also been growing, increasing at an average annual rate of 7 percent over the period 2000–2003, outpacing 4 percent growth in tourist demand.

The government’s objectives are to reach 18 million tourists over the next ten years, to develop more than 500 km of coastline, to build and rehabilitate several airports and to increase hotel capacity (150,000 rooms in 2004). The planned expansion and development of cultural and infrastructure facilities should further enhance tourism performance in the coming year. Various plans for tourism villages and hotels are under study or construction, in particular south of the new airport of Marsa Alam. A cooperative agreement was signed in September 2004 by the Minister of Tourism and the TUI to develop the Mediterranean coast. It plans to build nine four‐star hotels with some 4300 rooms over five years, at an estimated cost of US$ 500 million.

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Investment opportunities for foreign companies involve in particular improvement of tourist infrastructure (desalination of water, water treatment and purification, electricity and telecommunications networks, and transport), consulting services for feasibility studies, hotel management, sports and entertainment equipment, know how relating to museums, sound and light, spa therapy, real estate management for residential tourism programmes, etc.

Investors in the tourism industry, both domestic and foreign, are eligible for the benefits provided by the Investment Guarantees and Incentives Law, in particular tax exemption for five years and exemption from customs duty on the products and goods needed for tourism projects. Furthermore, land is granted on the basis of US$ 1 per m², with the obligation to build within two years.

Tourism regulation and development are the responsibility of the Ministry of Tourism and the Tourism Development Authority (TDA), the main public authority in charge of investment promotion in areas designated for development of tourism. It also monitors individual tourism projects and ensures that they meet minimum standards

Agriculture, fishing and food processing industry

Egypt is a major producer and consumer of agricultural products, an exporter (primarily of oranges, potatoes and onions) but also a net food importer (more than US$ 3 billion these past few years). This strong dependency, particularly for the main basic food products, is a major problem for the Egyptian government, which targets food security and self‐sufficiency in basic commodities while also increasing its export potential.

The main branches of the food processing industry include wheat milling and bread making, edible oil production and production of soft drinks and alcoholic beverages. Egyptʹs main exports in this

sector are milled grain products, canned vegetables and fruit, and sugar products.

Local producers need capital goods and freezing technology as well as value added services such as packing, packaging, and marketing. The mechanisation market is estimated at EGP 5 billion (EUR 650 million) for 2003 and is growing steadily.

Egyptian fishing and aquaculture production amounted to 800,000 tons worth US$ 1.5 billion, approximately 1.7 percent of GDP. The sector employs 100,000 (licensed) fishermen and 100,000 people in aquaculture. Although production has doubled in ten years, Egypt is still unable to meet its needs, with imports representing a quarter of marketed volume.

The General Authority for Fish Resource Development (GAFRD) under the Ministry of Agriculture and Land Reclamation is the state agency responsible for management and control of Egyptian fisheries. The Government is becoming increasingly aware of the fundamental role that fisheries and related activities can play in Egyptʹs economy. Its main goals are to increase the annual catch to 1.5 million tons by 2017, to encourage export of fish and fishery products, to expand fish farming at various inland lakes, and to enlarge and modernise offshore fishing in the Egyptian economic zone and international waters.

Since the 1st of January 2004, Egypt has been authorised anew to export fish to the European Union, but aquaculture and shellfish products remain prohibited. Access to this new market has created new opportunities.

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Success Story: The Dutch Heineken company brews 100 million litres of malted drinks every year It was then the largest merger‐acquisition operation in the modern financial history of Egypt. In September 2002, the Netherlands group Heineken announced that it had just obtained the agreement of the Egyptian market authorities to make a bid for 100 % of the shares of the National brewer, the Al Ahram Beverage Company (ABC). The offer, which valued ABC at 287 million dollars, was to be successful.

Al Ahram Beverage, created in 1897 and privatised in 1997, employed nearly 4,000 people and had a turnover of 105 million dollars. It is still nowadays the market leader in beer (Al‐Ahram’s Stella and Al Gouna’s Sakkara brands) and alcohol‐free malted drinks. The group also commands strong positions on the wine market, on distilled beverages and certain soft drinks. The constitution of a serious challenger, EIBCO, by local investors, in October 2005, with the ambition of offering a similar product under its brand for each of ABC’s references, has quite stimulated competition in a local market little fought for until then.

For the Netherlands group, this new acquisition completed its development in the Arab world (a site in Lebanon with the Almaza brewery and in Morocco), and marked its return to Egypt, forty years after having pulled out of the country. The « Green Giant » has acquired a new place as leader in the main Arab‐Muslim market and would especially like to develop the Fayrouz brand (alcohol‐free beer) in other countries in the region, as well as in Africa.

Heineken is also counting upon this acquisition to substitute its own brands for those produced locally by ABC for the account of Carlsberg or Löwenbrau. The objective: to supply the tourist areas of the country and the Western consumer.

For ABC, which kept its name, its brands and its directors, the arrival of the international group provided it with new commercial capabilities at a moment when the market is developing strongly but when the sources of finance are rare, especially because of the poor image of the alcohol sector in any Muslim country.

Israel

Overview

References

Capital Jerusalem Surface area 21,060 km2 Population 7,002,600 inhabitants (2006) Languages spoken Hebrew, Arabic, (English, Russian) GNP (dollars) US$ 123 bn (2005) GNP/per capita (dollars) US$ 18,266 (23,416 in ppp.) in 2005 Religion Jews (80.1 %), Muslims (14.6 %),

Christians (2.1 %), others (3.2 %) National holiday May 5 (Independence in 1948) Currency (March 2007) Shekel (NIS)

1 Euro = 5.56 NIS – 1 US$ = 4.16 NIS Association agreement with EU

Signed on 20/10/1995; implemented on 1/06/2000 EU web site: http://www.eu‐delegation.org.il

WTO membership Member since 1995

Sources: Annual Report 2005, Bank of Israel; IMF: Conclusions Article IV 2005, Country Report n°06/120, Mars 2006 and World Development Indicators 2006; Central Bureau of Statistics (CBS).

Economic profile

Despite ongoing tension in the region, Israel has evolved in just 20 years from an emerging economy to an industrialised nation. Today it is a regional economic power with GDP of US$ 123.5 billion (NIS 554 billion) recorded in 2005, the equivalent of US$ 158 billion in purchasing power parity according to IMF statistics.

After slower growth from 2001 to 2003 (1.3 percent) due to conditions during the second intifada in the Palestinian Territories and the global slump in technology stocks that slowed investment in high‐tech companies, significant recovery took place, with GDP growth 4.8 percent in 2004 and 5.2 percent in 2005. The main motors for such strong growth were exports, private consumption, and rapid expansion in high technology industries and tourism. This new positive cycle was favoured by the interest shown by foreign investors.

Services are the engine of Israeli growth, accounting for 77 percent of GDP in 2004 and employing 76 percent of the labour force. These trends are due primarily to a series of reforms and state disengagement from certain activities. From 1986 to May 2005, nearly 90 companies were privatised, notably the national carrier El Al, the maritime company Zim Israel Navigation Co., the telecom operator Bezeq, and the electricity operator Israel Electricity Corporation (IEC). The manufacturing sector, which accounts for 14 percent of GDP and employs 16 percent of the working population, is increasingly specialising on the production of goods with high technological content.

Israel is an export‐oriented economy and foreign trade represents nearly 90 percent of GDP. Commodity exports reached nearly US$ 38.6 billion (US$ 25.5 billion if diamonds are excluded) in 2005 and imports US$ 44.9 billion (US$ 35 billion excluding diamonds).

Israel exports mainly manufactured goods, in particular high technology products (US$ 11.7 billion) but also US$ 6.9 billion worth of low technology products according to the classification of the Israeli Office of Statistics CBS. 80 percent of imports are made up of raw materials (US$ 9.6 billion if raw diamonds are excluded and US$ 6.7 billion if oil is also excluded) as well as capital goods (US$ 6.2 billion).

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The United States is the main destination for Israeli exports (US$ 16.8 billion in 2005), followed by the European Union with US$ 10.7 billion: Belgium, Great Britain, Germany, and the Netherlands. EU countries are the main source of imports; with purchases from the EU amounting to US$ 16.8 billion in 2005 (Belgium, Germany, Netherlands, Great Britain) followed the US (US$ 9.7 billion).

The government is determined to pursue structural reforms, the principal components being privatisation of companies operating in key sectors such as oil refining, banking and armaments as well as reorganisation of the electricity and water sectors. An ambitious programme of infrastructure development (transport, energy, sea water desalination, environment…) under BOT arrangements is under way, funded by EUR 10 billion in investments over a period of four to five years.

Israel has signed free trade agreements with its main trading partners: the United States and the European Union, the European Free Trade Association (EFTA), Canada, etc. Moreover, Israel has launched regional trade initiatives, such as the “qualifying industrial zones (QIZ)” aimed at reinforcing economic and trade co‐operation with Jordan and Egypt.

Israel has signed investment protection agreements with 30 countries as well as agreements to rule out double taxation with 40 countries and it is a member of the Multilateral Investment Guarantee Agency (MIGA).

Foreign investment amounted to US$ 9.66 billion in 2005, 67 percent growth compared to the US$ 5.8 billion recorded in 2004. FDI came to US$ 5.71 billion, with foreigners investing more than NIS 2 billion on the Tel Aviv Stock Exchange (TASE) in 2005.

Country risk

In terms of country risk ʺthe economic outlooks remain solidʺ (conclusions from Standard and Poorʹ S Rating Service for 2006 which gave Israel an ʺA ‐ʺ rating for short term sovereign debt). Moodyʹ S rating is A2.

Key challenges

Due to its lack of natural resources, the Israeli economy is heavily dependent on foreign trade. Israel’s two largest trading partners are the United States and the European Union. The global economic downturn that began in 2001 heavily impacted economies dependent on foreign trade and Israel was no exception. However, with the first signs of recovery in the global economy, Israel has reason to be confident that it will receive the positive flow‐on effects.

The domestic security situation over the past three years has been difficult as Israel seeks to sign and ratify peace agreements with its neighbours. It should be noted however that the security situation has not affected the day‐to‐day running of the industrial and other economic‐related sectors.

Strong points

Apart from Silicon Valley, the highest concentration of high‐tech companies in the world is to be found in Israel, with 4,000 businesses. The country has become a production centre for high tech products, especially software. It is also a leader in the fields of aeronautics, generic drugs, telecommunications and biotechnologies. This phenomenon can be explained first and foremost by the presence of a highly skilled and qualified workforce. There are 135 scientists and engineers for every 100,000 workers, which is the highest proportion in the world. An increasing number of Israeli companies are listed on Nasdaq and in European stock markets. The sector still has real development

Invest in Israel

potential. Many multinationals are long‐time investors in Israel and to this day continue to expand their research, development and manufacturing plants. They include: Motorola, Intel, Microsoft and many more. Foreign firms have acquired many Israeli start‐up firms. Many mergers have taken place, as well as other joint projects that involve Israeli companies with their foreign counterparts.

Israel’s Investment Promotion Centre (IPC) Invest in Israel was established in 1993 as the investment promotion centre of Israel’s Ministry of Industry, Trade and Labor, Foreign Trade Administration. The centre serves as the marketing agency for foreign investments in Israel and as a resource for foreign based companies and individuals who are interested in investigating direct investment and joint venture opportunities in Israel. Invest in Israel works closely with potential and current investors before, during and after investment, and serves as a resource for investment related information about Israel. It is also in charge of project approval and granting of incentives.

The Centre is positioned to capitalize on Israel’s unique advantages and positive economic factors, and its main missions are:

To position Israel as an attractive investment location

To guide the investor in the decision making process

To locate appropriate local partners

To serve as a resource for economic information for potential investors

Provide customized pre‐visit briefing materials.

IPC is mainly in charge of organizing investment related visits, providing necessary information and other assistances and exchange activities concerning FDI.

The Investment Promotion Center also produces publications and presentations, to keep investors and other players in the global economy with an interest in Israel, up to date with the dynamic Israeli economy as well as Israeli companies as they continue to strengthen and succeed.

Web site: http://www.investinisrael.gov.il

How to invest in Israel In recent years, the Government has introduced major structural reforms to create an attractive environment for foreign investment.

An extensive legal framework of incentives in the form of financial and tax breaks has been adopted. The investment incentive package first appeared in the Law for the Encouragement of Capital Investment (LECI), adopted in 1959 to attract private investment and foster business initiatives, employment, and exports.

Israel has a quite liberal investment regime, with most activities open to private investors, both foreign and domestic.

There are no approval or registration requirements for investment in Israel nor any restrictions on repatriation of profits or capital. Both residents and non‐residents can buy securities traded on the Israeli stock exchange as well as mutual fund certificates. Companies with foreign capital can buy or lease land with prior authorisation.

Israel encourages domestic and foreign investments by offering a wide range of incentives and advantages. Companies with foreign capital are also eligible for additional incentives. Investment incentives are outlined in the Law for the Encouragement of

Invest in Israel

Capital Investment. They include grants, tax incentives (rebate of taxes on profits), support to research and development, financing of wages, and support to training. The incentives offered depend on the location of the company.

Israel is divided into three zones: zone A = Galilee, the Jordan Valley, the Negev, and Jerusalem; zone B = lower Galilee and northern Negev; zone C = the remainder of the country. They also vary according to the amount invested or the degree of foreign participation as well as the type of activity. Preference is given to initiatives in industry, tourism, and agriculture. Special emphasis is put on high‐tech companies and R&D activities.

More information on investment incentives is available on the Invest in Israel website: www.investinisrael.gov.il

While the corporate tax rate is 25 percent for a registered company owned by a local investor, the rate for foreign investors approved in the framework of the 1959 law’s grant programme varies between 10 percent and 20 percent, depending on the percentage of foreign ownership. The standard rate is 31 percent for a company whose investment initiative has not been approved. Tax breaks are granted for a period of seven years.

The government has created a free trade zone and a free port in Eilat. Companies established at this port are entitled to a number of incentives, in particular exemption from income tax for seven years and taxation at a maximum rate of 30 percent.

Legislation on industrial export parks is also in force but there is no zone of this kind at this time. The Ministry of Industry and Trade has also created a fund for assistance to exporters.

Finance & banking in Israel Israel’s banking system is quite similar to that of the developed countries of Europe or America, backed up by a relatively sound public and private banking environment and independent financial and monetary regulatory bodies.

There were 34 banking establishments operating in Israel at the end of 2005, including 18 merchant banks, six mortgage financial institutions, five investment banks, two joint service companies and three foreign banks.

Five large bank holding companies ‐ Hapaolim, Leumi, Discount Bank, Mizrahi and Bein Leumi (the First International Bank of Israel) ‐ control 94 percent of the market and their net income is estimated at 6.7 billion shekels (1.2 billion Euros), 30 percent more than in 2004.

In accordance with Israeli commitments to the General Agreement on Trade in Services (GATS), the right to enter the banking market is free of restriction. Nevertheless, in practice, there are few foreign banks in Israel and the few that exist are limited to representational offices: Citibank, HSBC, the Standard Chartered Bank and (since the beginning of 2006) BNP‐Paribas working through subsidiary companies.

Privatisation and the move to mergers and acquisitions are other major aspects of reform of banking structure. The State has sold almost all its shares in the Hapoalim Ltd Bank and a portion of its shares in Israel Discount Bank Ltd. The State holds just 28.3 percent of capital in the Leumi Ltd Bank. In January 2005, the Mizrahi and Tefahot banks merged, becoming the number one bank in Israel for mortgage loans.

In addition to privatisation of State holdings, several reforms were carried out in the nineties to bring Israeli banking up to international standards and to avoid risks related to the formation

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of conglomerates. Banks must maintain the minimum ratio of equity capital (9 percent) in accordance with the international standards enacted in Basle II.

Liberalisation of the foreign exchange market was consolidated in 2003 and all transactions in foreign currency between private individuals and resident or non‐resident companies are now allowed.

Institutional investors and other financial services are well developed. In August 2005, 627 reserve funds (for severance pay, advanced study, and other purposes) were active, with total assets of NIS 227 billion. The overall assets of pension funds amounted to NIS 183.4 billion in August 2005 and the number of mutual funds came to 860, managed by 41 mutual fund management firms. Assets were worth NIS 133 billion in October 2005.

Money market profits on the modern Tel Aviv Stock Exchange (TASE) ‐ a mature market of financial actors specialised in venture capital (thanks in particular to the Yozma programme launched in 1996) and composed of 10 investments funds ‐ came to some US$ 20 million, used as a catalyst for venture capital. The most important indexes are the TA25 and the TA100 (canvassing the 25 and 100 most highly capitalised companies) as well as the Tel‐Tech index for technology stocks.

The Israeli stock market registered several records in 2005 and it is one of the least volatile emerging markets. In 2005, 584 companies were traded, representing market capitalisation of US$ 122.6 billion (stocks only). On 5 January 2006, the market hit record high turnover of US$ 947 million and the TA‐25 index posted record high trading volume of 790 thousand units. 1,185 securities were traded on the TASE and securities indexes increased by 20 percent. Foreign holdings reached a record US$ 2.1 billion in 2005 (11 percent of the market), according to the TASE 2005 annual report.

Telecommunications & internet in Israel The telecommunications market increased by 7 percent per year between 1998 and 2004, reaching total sales turnover of approximately US$ 5.7 billion. Israel continued to implement deregulation policy in 2005, in particular privatisation of Bezeq, in operation since 1989, taken over in September 2005 by the Apax‐Saban‐Arkin group with a controlling share in this previously State‐owned telecommunications firm. Other challenges include liberalisation of the fixed‐line domestic telephony market and design of a regulatory framework that effectively promotes competition.

The opening of the sector to competition has helped develop a wide range of services as well as bring about lower prices, making the most modern technologies like internet broadband, Wi‐Fi or multi‐channel TV accessible to more people.

There are currently three million landlines in service. Since the end of Bezeq’s monopoly of fixed telephony, Hot Telecom has become the second largest operator. Currently, internet providers (ISP) Netvison and Internet Gold Lines are testing telephony services based on the VoIP protocol.

At the end of 2005, the cellular operator Golden Lines Communications Services secured a new licence enabling him to provide services on the fixed telephony market and VoBB (Voice over Broad Band).

For international telephony, three operators compete with Bezeq International: Barak (in association with Israeli companies Calcom and Matav and foreign companies Sprint, Deutsche Telekom, and France Telecom); Golden Lines (with Israeli companies Aurec and Globscom and Italy’s Italia Telecom); and Internet Gold Lines (Eurocom Communications) since June 2004. NetVision (supplier of internet services) and Xfone Communication (a British‐Israeli

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company) entered the international communications market in 2004.

Four operators share the national cellular communications network: Cellcom (BellSouth, Safra Group, Discount Investment Corp.) with approximately 2.25 million subscribers; Partner Communications‐Orange (Hutchinson, Elron Industries, Eurocom, Matav and Polar) with nearly 2 million subscribers; Pelephone (owned by Bezeq, operates with CDMA technology) with approximately 1.95 million subscribers; and MIRS (Motorola Israel) with 250,000 subscribers. There are approximately 6.5 million mobile phones in service, a penetration rate of over 97 percent. Total sales turnover for mobile telephony came to some US$ 3.1 billion in 2004.

There are some 60 internet providers, mainly Netvision, Internet Gold, Bezeq International and Barak Online, Bezeq Zahav, Hot Telecom, and Golden Delicious Lines, totalling 3.6 million subscribers in 2005. Only 30 months after it was launched (i.e. at the end of 2004), high‐speed internet access (by ADSL and cable) recorded a 15 percent penetration rate (approximately 40 percent of households). By the end of 2005, there were nearly 1.22 million subscribers to ADSL access, a penetration rate of 65 percent of households (South Korea alone ranks higher, with 75 percent). It should be noted that only Bezeq offers ADSL services, with other operators proposing cable broadband. Wireless internet is also being developed, with more than 150 Wi‐Fi connexion points throughout the country.

Israel is among the 30 best‐equipped countries in the world in terms of computer equipment, with a majority of the households having a computer. It is a fast‐growing market, with +16.4 percent in volume recorded in 2004, turning out more than 612,000 units for an amount of more than 1 billion dollars per quarter. Market opportunities for companies are estimated at US$ 52.14 million,

while investment in IT services is expected to reach US$ 497 million in 2006.

Three cable TV providers as well as a satellite TV provider have been issued general licenses. The rate of penetration for household cable TV has reached more than 55 percent. At the end of 2003, 77 percent of Israeli households (1.4 million) were subscribed to digital multi‐channel TV. The rate of penetration for digital satellite TV and cable TV is 70 percent. The range of services offered on internet has grown considerably thanks to liberalisation, particularly in the banking environment and government. For example, the government has authorised use of electronic signatures for identification purposes and monetary transactions; and taxes or fines can be paid online.

In 2006, Israel had 3 million main telephone lines and 6.3 million mobile customers on four networks. It is one of the few countries to have adopted broadband Universal Service Obligation (USO) for Broadband Regulation (100 percent population coverage in four years). In 2004, The World Electronics Forum (WEF) ranked Israel seventh in telephone infrastructure and cellular mobile subscriptions and first for availability of cellular phones.

Business and investment opportunities in Israel The country has many comparative advantages in a wide range of activities, in particular the high technology sector, aeronautics, civil and military electronics, electronic components, nanotechnologies, telecommunications, data processing, safety, biotechnology, medical instrumentation etc. and absolute comparative advantages in certain growth industries like security on the internet (for example encryption of online data), production of optical tools for military use, innovative administration techniques for certain drugs, etc.

Invest in Israel

The Israeli market also offers opportunities in agriculture and agrofood, environmental technologies and transport. The country is committed to a long‐term programme for modernisation of its road infrastructure, production and distribution of power stations, water treatment units, and telecommunications networks.

In addition, the government intends to broaden its privatisation programme in 2005‐2006, reforms relating mainly to: privatisation of Bazan (oil refineries located at Ashdod and Haifa); privatisation of the Leumi Bank (9.99 percent of State holdings having been yielded in 2006 to the US funds Cerberus Capital Management LP and Gabriel Capital Management for NIS 2.474 billion); merging of certain components of Israel Military Industries IMI with Rafael (the Armament Development Authority Ltd.) while carrying out the second stage of the privatisation plan; completion of reforms in the electricity sector; implementation of reforms in the real estate sector, including the processes of planning and construction; creation of a water control authority as well as distribution companies.

The move to mergers and acquisitions continues to generate major inflows of FDI, as testified by the purchase by Warren Buffet of 80 percent of the Israeli company Iscar for US$ 4 billion at the beginning of 2006, one of the most important foreign investments ever made in Israel after Intel.

Israel has a longstanding tradition in the diamond industry and it is the world leader in polished diamonds with more than 1200 companies installed in Ramat Gan producing two thirds of the world’s highest quality diamonds and the largest diamond exchange. Investment incentives are also available in this sector.

Electronics and ICT sector

Development of Israel’s high‐tech sector is an impressive success story. The excellence of its data‐processing industry, information

technologies, and telecommunications is a major asset for the country today and it continues to present high potential. Israel’s advanced national telecommunications infrastructure – a 100 percent digital network – has propelled Israel forward as a leading global telecommunications supplier. Producing cutting‐edge, innovative technologies, Israeli communications companies continue to attract top‐tier institutional investors. Dozens of telecommunication multinationals have established themselves in Israel, including Motorola, Siemens, Qualcomm and Alcatel, all benefiting from Israelʹs highly skilled workforce and increasingly developed market.

Israel is active in many key areas, such as wireless technologies (Wi‐Fi and Wi‐Max networks), satellite systems, broadband & optical technology, internet security (Firewalls by Check Point), microchips (Intel)… Israel also distinguishes itself in medical imaging and devices, electro‐optics, cellular tissues, aeronautics and nanotechnology. Niches and technologies for the future that are very promising for Israel include the pills camera, instant data transmission via internet and USB keys.

Software production is flourishing, employing more than 15,000 people. Electronic components constitute an economic and strategic activity essential for the electronic industry in Israel. In 2004, Israel produced nearly US$ 2.3 billion worth of electronic components (5 percent of the world market), of which 98 percent were exported. The country’s academic research centres, the availability of funding (in particular massive involvement of venture capital funds in start‐up financing), and government‐supported programmes and investments in research and development (technological incubators, various Office of the Chief Scientist support programmes, participation in international programmes such as EUREKA, etc,) have contributed to the establishment of major multinationals and leading international companies in this field.

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Israel has acquired highly developed expertise in the fields of metrology and inspection systems. Applied Materials for example is the world leader in this kind of equipment.

Deutsch Dagan is one of just a handful of connector manufacturers in Israel and the exclusive representative of Deutsch, producing high‐tech parts and assemblies for the automotive industry. It is a major supplier of the Israeli military and electronic companies.

One of the main strong points of the Israeli semiconductors industry is the many research laboratories in microelectronics. The Braun Submicronic research centre at the Weizmann Institute of Sciences is equipped with all the material needed to design, manufacture and study electronic micro‐components.

The Technion Institute recently set up a sophisticated nanoelectronics centre, the Russel Berrie Nanotechnology Institute. About fifty research groups are currently focused on nanotechnologies. Hebrew University of Jerusalem and the University of Tel‐Aviv are also doing research in this field.

Life sciences

The life sciences sector has experienced considerable development in Israel thanks to a favourable economic, technological, and academic environment. Indeed, Israel has one of the highest investment rates in the world in civil research and development, estimated at 2.9 percent of GNP in 2004 according to OECD. Two academic institutes, five universities, and the many local research institutions receive funding from this funding. The sector covers mainly medical instrumentation, pharmacology, and biotechnologies, which include in particular therapeutics, diagnosis, bio‐data processing, and agro‐technologies. There are 700 companies employing 2000 people. Exports brought in US$ 3.3 billion in 2005 mainly to the US (63 percent), Europe (27 percent) and the Middle East and Asia.

This market represents sales turnover of US$ 3.5 billion, half of which is carried out by Lumenis, Given Imaging, Healthcare Techno and Philips Medical Systems. The industrial plant market, evaluated in 2004 at US$ 2.4 billion (98 percent exports), is concentrated on Elron Electronic Industries, the Elisra group and HP Israel. The medical equipment market was estimated in 2004 at nearly US$ 1.1 billion, 95 percent intended for export. Exports in the sector grew by 35 percent in 2005 to reach US$ 3.3 billion. This compares to overall Israeli exports (exclusive of diamonds) of US$ 25.5 billion per annum.

The biotechnology sector has become a field of national excellence, with more than 130 companies, of which about fifteen are traded on the stock exchange. These companies work in a wide range of activities, from genetic engineering to bio‐data processing and from development of therapeutic substances to experimental products based on cellular genes.

In the pharmaceutical industry, 74 laboratories are operational, including TEVA Pharmaceutical Industries, a world leader in generic drugs, which produces Copaxone to fight multiple sclerosis.

A biotechnology park was created on the campus of the Hadassah Medical Centre in Jerusalem, to be used as an incubator for start‐up companies. It provides laboratory facilities for some 25 companies (forecast for 2007) and is home to the Israeli Life Science Industry (ILSI) dedicated to life sciences. In addition, among the 25 technological incubators created by the government, five are devoted exclusively to life sciences. A consortium of bio‐pharmaceuticals (Pharma Logica) was created in 2002 to establish cooperation between the pharmaceutical industry and university research centres. Thus, there are numerous prospects for partnership and co‐operation in this field.

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Energy

Energy consumption, particularly electricity, is growing fast. Due to its limited energy resources, Israel imports virtually all its oil needs (US$ 6.8 billion in 2005 and US$ 4.5 billion in 2004) from Egypt, Mexico, West Africa, the North Sea, and more recently from Russia. Oil exploration in Israel has not been successful, but the Israeli Oil Commission estimates that Israeli’s underground is likely to contain 5 billion barrels. Israel Oil Refineries (IOR) runs the two existing refinery facilities in Haifa and Ashdod.

The government decided at the beginning of 2000 to tap natural gas to produce electricity. In 2003, the State created the Natural Gas Authority (NGA) and the transport company Israel National Gas Lines (INGL) under the Ministry of Infrastructure to elaborate a plan of national interest, with natural gas accounting for 60 percent of overall production of electricity in the long term.

Annual demand for gas is 1.6 billion m3 for electricity and industry and the NGA forecasts requirements for the 20 years to come at 11 billion m3.

The two largest users are the Israel Electric Corporation (IEC) and Oil Refineries Ltd (Bazan).

The Yam Thetis consortium will be the main natural gas supplier to IEC for an 11‐year period starting 1 January 2004. Yam Thetis also signed an agreement in 2004 for the provisioning of natural gas from Ashqelon to the Ashdod refinery. This agreement covers a period of 10 years, renewable if warranted by developments at the Ashdod refinery.

A historical agreement was signed in July 2005 concerning export of gas from Egypt to Israel. An Israeli‐Egyptian consortium “Eastern Mediterranean Gas (EMG)” will import Egyptian gas for a period of 20 years, part of this gas having to be sold in Israel, but another portion being available for possible re‐export to Europe

and Turkey. In addition, EMG and IEC have signed a contract for the supply of 1.7 billion m3/year for 15 years. EMG is also in charge of building the pipeline from El Arish in the Sinai to Ashkelon.

A wide‐ranging plan for natural gas supply was launched to cover Israel’s deficit, expected to reach 50 billion m3 by 2025. The government is looking for suppliers and additional managers for Yam Thetis and EMG.

Israel National Gas Lines (INGL) holds a monopoly on transport that will last at least until 2007, the target date for privatisation. As for the future distribution network, the NGA will grant regional licences, five of which are already scheduled solely for infrastructure.

These licences will be granted under BO (Build/Operate) arrangements for low‐pressure systems. The grid systems on the southern portion (Ashdod‐Ashkelon) already exist and the licence should be granted end 2005 ‐ early 2006. Invitations to tender for the distribution networks however are intended mainly for local companies.

Israel has become a major actor in sustainable energies. Developments in the field of alternative energies include flat solar collectors for domestic use, solar ponds and a parabolic trough technology. Regulations require that all new buildings equipped with solar collectors for water heating. Household solar collectors save some 3 percent of overall energy consumption and Israel boasts one of the highest rates of domestic solar heating worldwide, used in about 75 percent of households. Israeli companies have pioneered solar technologies that are used worldwide. Solel, for example, was the first to develop and install a large‐scale solar‐powered electricity generating plant in southern California’s Mojave Desert. Plans are now going ahead in Israel to establish a 100 MW solar power plant in the northern part of the Negev desert. The technology is available but the cost is still too

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high to compete with alternatives, particularly in light of the low cost of natural gas. In recent years, Israel has taken important steps towards advancing the use of alternative energy. A 2002 government decision called for introduction of renewable energy in the electricity sector so that by 2007, at least 2 percent of electricity consumption would be produced by renewable energy (beyond that of domestic solar heaters) and by 2016 at least 5 percent should be produced by renewable energy.

Transport sector

The Ministry of Transport (MoT) has launched a national master plan for interurban and suburban transport infrastructure. Airport infrastructure projects involve building of a new terminal for private and business flights at the Ben Gourion International Airport. The terminal operator would work under a franchise, with no ties to service providers on the ground, paying royalties to the Israel Airports Authority (IAA). Cost is estimated at NIS 4.3 million. Other projects include the transformation of Haifa Airport into an international airport (at a cost of NIS 2 million) and construction of the new Timna Airport near Eilat. The BOT tender should be published in 2006 for start up in 2010.

In the field of rail transport, a five‐year plan called “Railways 2000” was launched in 2002 to facilitate the country’s network. The objective for 2010 is to reach 40 million passengers and 15 million tons of goods.

The “Suburban Railway” project seeks to improve and modernise the existing network and build new lines, to be integrated in a network that would consist of 1,230 km of rails by 2010. There are also important needs for railway equipment and electrification, likely to require some 25 percent of investment.

As for roads, the Israel National Roads Company has a budget of US$ 19 billion, to be used over the next five years for development

of new roads, renovation of existing roads and better road safety. For road construction, the government generally provides land for private consortia (local and foreign companies) to work under BOT arrangements.

The 2004 Port Reform allowed the three principal Israeli ports of Haifa, Ashdod and Eilat to accede to autonomous management through the Israel Ports Development & Assets Company (IPC). Overall, merchandise traffic at Israeli ports came to 37.5 million tons of goods in 2005. The government’s objective is to reach 65 million tons by 2010, thanks to investment in modernisation, especially at Haifa and Ashdod. The cost of this initiative is estimated at US$ 2.1 billion over 10 years.

The Eitan terminal (Port of Jubilee) in Ashdod was officially inaugurated on 2 August 2005. It is intended to increase capacity for deep‐water cargo liners and to improve the transfer of goods, at a cost estimated at US$ 638.32 million. Some 14.5 million tons of goods (potash and all agricultural products) went through the port of Jubilee in 2004. There are also plans to equip the port of Haifa with a railway connecting it to inland areas and bordering countries, often the final destination for commercial traffic entering the port. An extension to the Palestinian Territories is envisaged and a multimodal transport system is also planned between Carmel and Haifa. Some NIS 3 billion is expected to be invested in the development of the port of Haifa over the next five years, in particular construction of the first part of the port of Carmel and extension of the quays. Work began in August 2005 and should continue until 2008. Beyond these two major undertakings, IPC plans to inject US$ 1.06 million in other projects, mainly for the development of already existing infrastructure, in particular extension to the north of the Port of Eilat.

It should be noted that there is no local production of materials for public works, which must therefore be secured entirely through

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imports. Expenditure for public works machinery and equipment amounted to EUR 40 million in 2002 (mainly tractors, cranes, winches, scaffolding, concrete mixers, bulldozers, excavators, lifts, escalators, trailers, etc).

Chemical industries

Thanks to minerals occurring naturally in the Dead Sea (the greatest source of bromine), Israel is one of the leading chemical producers in the world and chemicals are a primary export, growing at a rate of 24.5 percent in 2004, worth US$ US 6.43 billion (including fuel). The sector is evolving toward new products such as biotechnology drugs, products and manure. Nearly 40 percent are intended for Europe and 30 percent for the US.

The sector counts 150 companies. The main Israeli chemicals companies are Oil Refineries Ltd., Makteshim‐Agan Group, Haifa Chemicals Ltd., Agis Industries Ltd., Teva Pharmaceuticals and Israel Chemicals Ltd. The latter handles 11 percent of world potash production and 13 percent of international trade in potash, as well as 9 percent of worldwide supply of primary magnesium.

Agriculture and environmental technologies

Agriculture accounts for 2.4 percent of Israel’s GDP. Its importance is declining largely because of ongoing negative growth. Thus, while GDP has grown by 3.2 percent since 1986, agricultural production decreased by almost 10 percent, employing 50,000 people. However, it continues to play an important role in certain poor areas of Israel like the Jordan Valley or Arava.

Agricultural production rose in 2004 to US$ 3.9 billion, 23 percent of which is exported. These figures vary from year to year depending on weather and monetary fluctuations. Israeli agricultural exports brought in US$ 1 billion in 2005, 4 percent of total exports.

Israel produces 70 percent of its food needs, counting on imports for sugar, coffee, cocoa and almost all its seeds, oilseeds, meat and fish. Israel is 100 percent dependent on imports for cereals. Fish and oilseeds are imported in large quantities to meet some 50 percent of consumption.

Israeli is well known for its know‐how in intensive agriculture. Thanks in particular to the use of drip irrigation techniques, Israeli agriculture posts record productivity levels. For example, nearly 200 tons of tomatoes can be produced in one year on just one hectare. Israeli micro irrigation companies like Plastro Irrigation Systems are world leaders in this sector.

Advances by the profession have had a crucial influence on vegetable crops over the past decade. Innovations include: improvement and control of climate conditions in protected growing systems; use of substrata growing methods in regions where the soil is unsuitable for growing crops; application of Integrated Pest Management (IPM) methods for a wide range of vegetable crops; use of post‐harvest methods, means and treatment in order to lengthen shelf life and prevent rotting. Dairy‐product and technology exports include advanced and computerised milking and feeding systems, cow‐cooling systems (to reduce heat stress on cows over the hot, dry summer) as well as milk processing equipment, advisory services, and development of joint international projects.

Although Israel is a major producer of agricultural machinery, there are business opportunities for the import of certain specialised machines.

Israel has developed its agricultural mechanisation industry, leading to US$ 1.85 billion in export of agricultural raw materials and equipment in 2005, an increase of 16 percent. Exports by this sector have grown twice as quickly as the average for Israeli

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exports overall. Israeli agricultural equipment is especially strong on the gardening or orchard markets.

Like the other countries in the region, Israel is confronted with a crucial water deficit and deterioration of the quality of its resources. The projected increase in needs over the long term has led the government to step up efforts to mobilise water.

Natural resources provide some 1,750 million m³ on average per year, to which is added approximately 300 million m³ of recycled water and 150 million m³ of rainwater and storm runoff.

The public company Mekorot is the main producer of water resources. The company was restructured in 2004 and a new holding company (Mekorot Holding) set up, entirely controlled by the State and managing three subsidiary companies: “Mekorot Water Supply” (in charge of the national water supply system), “Mekorot Water Solution” (which handles project development, in particular desalination of water, irrigation and water treatment), and “Mekorot Assets” (in charge of managing the companyʹs assets).

Mekorot provides more than 1.3 billion m³ of water per year, more than 90 percent of drinking water consumption, and 70 percent of the water produced in Israel, the remainder being produced by agricultural communities and certain municipalities. The engineering company Tahal is responsible for planning and managing storage facilities.

Israel’s environmental industry counts some 250 small and medium‐sized companies. A national program has been designed to overcome the current water shortage within 10 years through initiatives such as re‐inflating aquifers. The government will create seawater desalination as well as water treatment and purification plants. Two desalination facilities, at Ashkelon and Hadera, have

been launched, funded in part by private investment. The Ashkelon seawater reverse osmosis (SWRO) plant started production in August 2005. Initially running at around 30 percent to 40 percent capacity, it will ultimately provide an annual 100 million m³ of water, roughly 5 to 6 percent of Israelʹs total water needs or around 15 percent of domestic consumer demand. The tender for construction of a desalination facility in Hadera was launched in 2006. It will involve a BOT (Build, Operate, and Transfer) arrangement, meaning that the winner will plan, construct, operate and maintain the facility, then return it to the State at the end of a 25‐year period. The desalination facility will produce 100 million m³ of water annually. The cost for constructing the facility is estimated at NIS 1 billion.

The French Development Agency (AFD) has approved a grant of 2 million Euros to finance feasibility studies for a water supply canal connecting the Red Sea to the Dead Sea via Jordan. The planned 180 km conduit would carry 1.8 billion m³/year of seawater to associated power desalination projects and provide 850 million m³/year of fresh water to Jordan, Israel, and Palestine.

Mekorot has launched WaTech, a program that involves private contractors in water exploration and project development, allowing (for example) the start‐up company Atlantium to develop a system of hydro‐optic disinfection of water.

A number of tenders will be published by 2010, in particular treatment of groundwater and rehabilitation of polluted wells, liquid waste processing, purification of drains and centralisation of sewerage systems, and quality control of water.

The construction sector has posted slower growth since 2002, with capital formation of roughly NIS 38.3 billion in 2005 vs. an average of NIS 44.5 billion between 2000 and 2003. It accounts for 8 percent

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of GDP, vs. 14 percent ten years earlier. Investment came to about US$ 9.8 billion in 2005.

The State, which has been gradually disengaging from civil engineering and public construction since 1995, will give the sector a boost by launching an ambitious infrastructure programme over the next five years. Future building sites in fact relate more to industry and commerce than infrastructure, but there are also prospects in the residential sector, particularly renovation and restoration of old flats.

There are not many Israeli construction companies, but the few that exist are rather powerful, of international dimensions. Local production of equipment for public works is almost non‐existent and the sector relies on massive imports. Equipment is very often leased, and this too could be an attractive opportunity for foreign companies.

Tourism

Tourism plays an important role in the services sector. Thanks to its geographic location at the crossroads of the East and the West, the diversity of its landscapes, and its historical, religious and cultural heritage, Israel offers many tourist attractions year round. Tourism was up by 23.4 percent in 2003, 41.6 percent in 2004, and 26 percent in 2005 (to 1.9 million tourists).

A key sector of the Israeli economy, tourism is regarded as the primary activity for generating economic growth. It accounts for 6 percent of GDP and employs 73,000 people (including 13,000 new jobs in 2005). In 2005, revenue related to tourist activity rose to US$ 1.9 billion (+30 percent). Tourism accounts for 11 percent of overall export of services.

Development objectives were to reach 3 million tourists in 2006 (only 1.9 were achieved in 2005) and 5 million in 2008 for the 60th anniversary of the creation of the State of Israel. The two largest

initiatives currently under way are a world evangelist centre on the banks of Lake Tiberius in Galilee, in the setting of a biblical garden (investment: US$ 50 to 70 million), serviced by three‐star hotels to accommodate 750,000 pilgrims from everywhere in the world; and a casino in Eilat which, according to estimates, should attract a million tourists a year.

Success story: global high tech alliance Tel Aviv - Grenoble The acquisition of the company GalayOr (literally « wave guide » in Hebrew) by Memscap, a high tech company based in Grenoble in France, illustrates perfectly well the capacity of the Israeli economy to give birth to start‐ups whose know‐how very quickly surpasses its own national market.

The alliance between the two enterprises is firstly strategic, since it is based on a partnership. The objective being to use the developments made by GalayOr together with the encapsulating and production expertise of Memscap. The two companies intend to provide the market, and more especially the telecommunications market, with a new generation of highly sophisticated optical products such as a closed‐loop digital variable integrated optical attenuator (« DVOA »).

The acquisition of GalayOr in the autumn of 2003 has provided optimal scope for the partnership. Memscap, with a Stock Exchange listing since 2001, offers the GalayOr directors the opportunity of purchasing shares in the new mother company. The R & D centre is to remain in Tel Aviv, whereas the sales and distribution network and production is split between the different Memscap sites in France, the United States and Egypt. « The acquisition of GalayOr reinforces our technological advantage» stresses Jean‐Michel Karam, The Chairman and Managing Director of Memscap. « We share the same vision and the same values. Together, we

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shall provide the world market with the best optical products using MEMS technology», declares Uri Geiger, Chairman and Managing Director of GalayOr, who has become Chairman of the group’s optical division boundaries.

Memscap (165 staff), is a specialist of the MEMS (Micro Electro Mechanical System). It is a microscopic system (up to 50 times smaller than the diameter of a hair) which links mechanical, optical, electromagnetic and thermal elements. This technology is developed on a semi‐conductor, giving it new functionalities at a very competitive cost.

GalayOr, based in Tel Aviv, is a supplier of optical systems built on a single chip made entirely of silicon. The company, which employs 16 people, created in 2000, is the fruit of the self placement process (four years research at the University of Tel Aviv) and was financed by venture capitalists

Jordan

General overview

References

Capital Amman Surface area 89,210 km2 Population 5,800,000 inhabitants Languages spoken Arab, English GNP/per capita (dollars) US$ 2,206 (2005) GNP (dollars) US$ 12.8 bn (2005) GNP/per capita (dollars) US$ 2,219 (US$ 4,825 en ppp.) in 2005 Religion Sunni Muslims (92 %), Christians (6 %),

others (2 %) National days Currency (March 2007) Jordanian Dinar (JOD)

1 Euro = 0,95 JOD – 1 US$ = 0,71 JOD Association agreement with EU

Signed on 4/10/1997; implemented on 1/05/2002 EU web site: http://www.deljor.cec.eu.int/

WTO membership Member since April 2000

Source: IMF, WDI 2006 and Article IV Consultations 2005.

Economic profile

Located at the junction of Asia, Europe and Africa, Jordan is bordered by Syria to the north, Iraq to the northeast, Saudi Arabia to the east and south, and Israel and the Israeli administered West Bank Area C to the west. It shares the Dead Sea coastline with Israel and the Gulf of Aqaba with Israel, Saudi Arabia, and Egypt.

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A small, middle‐income country, Jordan plays a pivotal role in supporting stability and security in the Middle East.

Its open economy has to reconcile limited natural resources. Only 6 percent of the country is arable land and water resources are among the scarcest in the world. However, there are sizeable mining resources, primarily potash and phosphates, of which it is the third largest world exporter.

Jordan was heavily impacted by the war in Iraq, disruption of trade with Iraq (its main export market) having not only important economic consequences for the economy but also having an adverse impact on prospects for development. Moreover, tensions in the region contributed to a significant drop in foreign investor interest in Jordan, in addition to marked deterioration of income from tourism.

After a spectacular GDP growth of 7.7 percent in 2004 (up from 4 percent in 2003) largely due to a surge in domestic demand, Jordan’s economic situation worsened in 2005 because of higher world oil prices and an unexpected drop in external grants (down from US$ 1.3 billion in 2004 to US$ 700 million in 2005). These external shocks contributed to a higher budget deficit (up by about 10 percent) and inflation rate (up from 3.4 to 5 percent). The external current account deficit has also deteriorated, largely because of a wider trade deficit; partially offset by private capital inflows and transfers from Jordanians living abroad. However, despite these shocks, real GDP growth came to 7.2 percent in 2005 according to the World Bank, reflecting the economy’s dynamic activity.

The leading sector is services, which account for 70 percent of GDP and the role it plays in supporting production is underlined in the King’s new economic guidelines. While the agricultural and construction sectors account for only a small portion of GDP, they employ a significant percentage of the workforce. The main

manufacturing industries are textiles, mining (potash and phosphates), fertilisers, pharmaceuticals, oil refining, and cement.

Trade increased by 22.2 percent in 2005. Overall, imports increased in all sectors, while there was little diversification in exports, with the trade deficit widening to US$ 6.169 billion (+43.6 percent). Imports increased by 27.8 percent in 2005, to US$ 10.5 billion (CIF), mainly due to higher prices for imported commodities and oil prices and purchases of machinery and equipment for the telecommunications and electricity sectors, development of the local building sector, and an upsurge in semi‐manufactured goods in special industrial zones (QIZ).

Saudi Arabia is the primary supplier of oil, with a market share of 23.7 percent (US$ 2.5 billion), followed by the EU with 22.9 percent (US$ 2.4 billion), China (9.2 percent), Germany (8 percent), and the USA (5.6 percent). Exports are also growing (+10.9 percent) with a total amount of US$ 3.6 billion. The United States is Jordan’s primary customer (30.8 percent), followed by Iraq (14.8 percent) and India (9.5 percent). Exports to the EU account for only 3 percent of total (US$ 109 million).

Foreign investments have increased appreciably over the past few years. After a very good year in 2000 (US$ 787 million in investments), the aftermath of the September 11th attacks as well as slowing economic growth and the war in Iraq reduced capital inflows to US$ 120 million in 2001 and US$ 64 million in 2002 before recovery took hold (US$ 424 million in 2003 and US$ 620 million in 2004). Market expansion and the attractiveness of special economic zones ‐ the Aqaba Special Economic Zone (ASEZA) and the Qualifying Industrial Zones (QIZ) ‐ helped the country attract a high level of FDI inflows in 2005, which according to the World Bank amounted to US$ 1.7 billion (13 percent of GDP), roughly four times the level recorded in the previous five years.

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The privatisation process continues, with 35 companies already sold out of the 40 officially announced, mainly cement factories, telecommunications, water distribution, and potash. Further privatisation transactions are scheduled, for example the phosphate companies JPMC “Jordan Phosphates Mining” and APC “Arab Phosphate Company”, Jordan Telecom, the state owned Silos and Mills, the Postal Service (currently being evaluated), the Queen Alia Airport in Amman (likely to be transferred under a BOT scheme in the framework of a rehabilitation‐extension program worth US$ 700 million), and the refinery of Zarqa (which seeks a strategic partner to meet the challenge of complete liberalisation of the oil market in 2008).

Furthermore, the master plan for the Amman Development Corridor, which aims to support Amman’s role as a regional centre for trade and services, has finally been launched. It includes a ring road between the suburb of Zarqa and Amman and a BOT scheme is to be finalised. Privatisation of the national carrier Royal Jordanian Airlines is slated for early 2006.

Jordan has signed a number of strategic trade agreements. It has been a member of the Greater Arab Free Trade Area (GAFTA) since 1998 and signed bilateral free trade agreements with most of the Arab League countries.

Jordan became a member of WTO in 2000 and signed bilateral free trade agreements with EFTA in 2001, the US. in 2002, and Singapore in 2003. The FTA with the US will eliminate duty and trade barriers on goods and services traded between the two countries.

Jordan also signed the Euro‐Mediterranean Association Agreement on 24 November 1997, which entered into force on 1 May 2002, governing gradual establishment of a free trade area over a period of 12 years. Industrial products originating in Jordan are imported into the EU free of customs duty and charges. Reciprocally, Jordan

has abolished customs duty and charges on a large number of products originating in the Community and is liberalising the remaining products in several stages, according to their impact on Jordanian markets. It also signed the Agadir Agreement in January 2003, which envisages a free trade system between Jordan, Morocco, Tunisia, and Egypt by 2006.

Jordan has further developed its export‐oriented policy, in particular with the creation of special free trade zones (Qualifying industrial zones or QIZ) and establishment of a special economic zone in Aqaba (ASEZ). Jordan is also committed to progressive liberalisation of the services sector, in the framework of negotiations regarding the General Agreement on Trade in Services (GATS).

Lastly, Jordan and Israel agreed in 2004 to widen the field of application of their 1995 customs agreement to a new list of products likely to benefit from lower tariffs, which also includes a chapter on the rules of origin and a chapter on trilateral trade with the EU. 2198 products from the two countries are taxed at only 3 and 5 percent, while medical products (the country’s major industry) benefit from total exemption. A second list of 188 Jordanian products (notably agrofood, oils, cement, paintings, textiles and related items, metal products…) will also profit from total exemption when entering Israel. Another list of products (phosphates, potash, tobacco, household appliances, plastic items, furniture…) will be progressively dismantled by 2010. The agreement was ratified on 20 May 2005 at the World Economic Forum at the Dead Sea, in force since September 2005.

Over the last 10 years the government has launched important political, economic, and social reforms aimed at transforming Jordan from a small, lower middle income, vulnerable country into a modern knowledge‐based economy. This is the core of King Abdallah II’s vision for the country: “Jordan Vision 2020”.

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This vision has been captured in a strategic plan and operational policies such as “Jordan First”, the “Social and Economic Transformation Plan (SETP)” launched in 2002 and the “National Social and Economic Plan (NSEP)” recently adopted for the period 2004‐2006, determining the principal objectives of the government’s 10‐year National Agenda. The eight key priorities are: human resources development, poverty alleviation, investment promotion, tourism, public sector reform, justice, health, and media and culture. Investments listed in the 2006 finance law in support of the National Agenda stand at US$ 1,188 billion (the total budget being US$ 4,9 billion).

Country risk

Rating agencies have a rather diversified vision of Jordan risk, according to the importance given to positive (growth, return of aid) or negative factors (deficits, geopolitical context):

Moodyʹ s changed its outlook on Jordanʹs sovereign ratings to stable from negative in January 2007 (after a change in opposite direction in early 2006). The agency estimates that the country will be able to mobilise new external assistance, that energy prices are down again and that the economy has been able to develop in 2006 at a rate above 6 per cent.

For Coface, the rating was downgraded to B‐ from B in July 2006. The agency estimates that in spite of a solid growth pulled by Jordan’s role as a support base for Iraq and the flow of regional capital, the rise in oil prices and the reduction of foreign aid are worsening fiscal balance. However, since the country may count on international assistance to avoid a major crisis, the risk remains reasonable.

EIU estimates that the regime is stable and that the way Government manages the economy inspires confidence, with one major concern (the imbalanced budget), but a robust

growth. EIU provided the following estimate of the main country risks as of March 2007 (AAA=least risky, D=most risky): Sovereign risk, B; Currency risk, BB; Banking sector risk, BB; Political risk, CCC; Economic structure risk, Ccc.

Key challenges

Scarce natural resources and reliance on foreign energy sources are some of the most important challenges that faces Jordan. The agriculture sector suffers from a shortage of water and available land.

The geopolitics of the country, at the centre of the Middle East, makes it vulnerable to the perceptions about events in the region.

Unemployment remains an economic burden that has not been helped by the fall in tourism receipts due to the Intifada and the events in neighbouring Iraq.

Strong points

The human element remains Jordan’s source of national pride. The country enjoys an educated, highly competitive, young and skilled labour force of 1.4 million. In a turbulent region political, legal and social stability remain priceless assets to the Kingdom.

The international trade agreements mentioned above are witness to Jordan’s business friendly and secure environments and have been a major source for attracting billions of dollars in foreign direct investments.

The Jordan Investment Board (JIB) The Investment Laws of 2003 and Investment Promotion Law of 1995 established the Jordan Investment Board as a governmental body enjoying both financial and administrative independence. Prior to that, investment procedures for exemption were conducted by a department within the Ministry of Industry & Trade. The

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creation of this organization came about as a result of the government’s realisation of the importance of increasing foreign direct investment to Jordan, and enhancing local investment in a bid to create new job opportunities, increase national exports, and the need for the transfer of technology.

The Jordan Investment Board is a government institution committed to working with the private sector, to promote Jordan’s diverse investment opportunities. The JIB presents state of the art services for facilitating registration and licensing procedures for projects, and offers all possible simplified procedures to investors:

A one Stop Shop service: a full service assistance package for investors; that consist of, licensing and registration services. Through this service investor can register and license his/her project in Jordan at one place within 14 days.

Dissemination of information, findings, reports, surveys and business opportunities through JIB publications, Conferences, Media Communication, and Public Relation Activities.

‐ Granting financial exemptions; mainly customs fees and sales Taxes, duty exemptions and income tax reduction.

‐ Offering a wide range of business opportunities that consist of eighty pre‐feasibility studies that cover the national strategic sectors; that Jordan maintain a competitive and comparative advantage (Information Technology, Pharmaceuticals, Dead Sea & Mining, Food Sector, Tourism and Entertainment and the Biotechnology sector which is under study),

‐ Carry on setting marketing themes for Jordanʹs image building; that include: Advertising in Journals, Video Scripts, Exhibitions, Conducting both Investment & Business Seminars, inviting senior reporters and Direct mail/telemarketing campaigns.

‐ Policy Advocacy through surveying the private sectorʹs issues and assisting by lobbying with government official channels

‐ SMEs support through Entrepreneurship Development Program (EDP), UNIDO

Web site: http://www.jordaninvestment.com

How to invest in Jordan? The Jordanian government has eliminated legal barriers to foreign investment and ownership in most sectors. The three investment laws of 2003 (replacing 1995 legislation) provide for equal treatment of Jordanian and foreign investors. Moreover, the privatisation programme and special‐status industrial zones are essential assets for boosting the country’s attractiveness.

These laws offer incentives and exemptions, especially for investment in industry, agriculture, hotels, hospitals, maritime transport, railways, leisure and recreational compounds, (7) convention and exhibition facilities, oil and gas production. Foreign investors can hold total ownership in projects, minimum required investment being approximately 63,000 Euros. However, foreign ownership cannot exceed 50 percent for construction and commercial services.

A new legal form for companies was created in 2002: the private shareholding company. This is the equivalent of a limited company, but with more flexible methods of creation and management that are more suitable to foreign establishments.

The government can grant additional incentives to other sectors, such as flying schools and the ICT sector.

Furthermore, the Investment Promotion Agency (Jordan Investment Board ‐ JIB) offers a 10‐year tax exemption, depending on the geographical location of the investment. The investment law divides the country into three development areas: zones A, B and C.

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Investments in the latter, the least developed areas of Jordan, receive the highest level of exemptions. All agricultural, maritime transport and railway investments are also classified as zone C investments, irrespective of their location. Qualifying Industrial Zones (QIZs) are treated as zone B projects unless they are located in zone C.

Investment incentives in Jordan include exemption from customs duty for a wide range of imported goods and exemption from income tax for a ten‐year period, depending on the location of the project: exemption of 25 percent for investments in zone A, 50 percent in zone B and 75 percent in zone C. The normal income tax rate for the majority of sectors is 15 percent and net profits from exports are fully exempt from income tax.

This investment law also provides guarantees to foreign investors, prohibiting expropriation and ensuring the right of foreign investors to repatriate in a fully convertible foreign currency 100 percent of profits and capital, including proceeds from the sale of shares when a company is liquidated, providing for unrestricted reinvestment of profits. The Jordanian Dinar (JD) is fully convertible for all commercial and capital transactions.

In 2001, a special economic zone was created in Aqaba, in an effort to halt declining activity at the port and facilitate implementation of activities to make Aqaba a major redistribution centre between the East, Europe and neighbouring countries. In order to attract foreign investors to these zones, many administrative facilities and tax incentives are granted to investors: customs duty and VAT exemptions, simplified formalities for foreign workers allowing an investor to recruit up to 70 percent of foreign labour, income taxes limited to 5 percent (except for insurance companies, banks and land transport), the possibility of acquiring land at reduced prices for the construction of infrastructure (hotels, hospitals, schools,

housing), and the absence of restrictions on financial transactions and investments.

Jordan joined the World Trade Organisation in 2000, signed the Association Agreement with the European Union effective May 2002, and concluded a free trade agreement with the United States. The FTA targets progressive dismantling of tariff and non‐tariff barriers between the two countries. This agreement covers the Qualifying Industrial Zones (QIZ), in operation since 1996. The QIZs offer duty‐free and quota‐free access for all products and services produced there, whereas in FTAs, customs duty is gradually reduced but still exist and a minimum of 35 percent of production must be of Jordanian origin.

These zones are of particular interest to textile and apparel industries, which are confronted with very high tariff barriers and import quotas in the United States. 13 public or private QIZs have been created.

More information is available on the QIZ website at: http://www.jiec.com

Export oriented companies can also set up business in the country’s special economic zones. Four free trade zones have been set up in Zarqa, Sahab, Queen Alia International Airport, and Kerak. In addition, legislation allows companies not located in free trade zones to benefit from the same incentives at the 23 “free zone points”, currently in operation in Jordan. Investment in free trade zones increased by 4 percent from 2002 to 2003, reaching US$ 721.9 million according to Free Zones Corporation (FZC) figures.

More detailed information on Jordan’s free trade zones is available on: www.free‐zones.gov.jo

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Finance & banking in Jordan Jordan is a middle‐income country with a financial sector that, by regional standards, is well developed. Jordan has been implementing various financial sector reforms over the past four years to bring its financial sector in line with international standards.

The Jordanian banking sector dominates the financial system, with 21 banks including eight foreign owned commercial banks (HSBC Bank ME, Standard Chartered Bank, Egyptian Arab Land Bank, City Group, Rafidain Bank, National Bank of Kuwait, Audi Bank and BLOM of Lebanon), two Islamic banks, and five investment banks specialised in lending to the agricultural, housing, rural, urban, and industrial sectors. There is no state ownership in the sector. The leading bank is the Arab Bank, which holds approximately 60 percent of overall banking assets. The Jordan Loan Guarantee Corporation guarantees bank loans granted to small‐and‐medium enterprises. The entire sector is supervised by the Central Bank of Jordan. In recent years, the Central Bank has strengthened banking supervision, now considered to be of a relatively high standard. It has been active in addressing issues related to non‐performing loans and selected cases of undercapitalised banks.

The Jordanian Dinar is fully convertible for all commercial transactions and capital transfers.

Supervision has been strengthened and regulations clarified and updated through banking reform. A new banking law was passed in 2000 to improve the effectiveness of the sector. This new law protects depositors’ interests, diminishes money market risk, guards against concentration of lending, and governs new banking practices (e‐commerce and e‐banking) and money laundering.

Jordanian capital markets are regulated by the Jordan Securities Commission, created in 1997. The main stock exchange is the

Amman Stock Exchange, which lists over 201 companies for market capitalisation of US$ 37.6 billion. Growth in foreign participation is attributable mainly to Saudi Arabia, Kuwait, Lebanon and Qatar, reaching US$ 15.9 billion in 2005 (42.3 percent of market capitalisation) compared to just US$ 179 million in 2004 (1 percent of market capitalisation). However, the sector is small and there are a limited number of financial products on the market. Recent developments include the requirement that all listed companies apply international accounting standards.

In 2004, the Jordanian insurance sector counted 26 companies, 1 life insurer, 7 general insurers, and 18 composite firms. The life insurance market ‐ which is a small part of the overall sector (only 14 percent) ‐ is dominated by the American Life Insurance Company (ALICO), which holds approximately 59 percent of all policies. The Insurance Regulatory Commission, an independent agency under the supervision of the Ministry of Trade and Industry, was created in 1999 to regulate the sector.

Telecom & internet in Jordan Reform in telecommunications and Information & Communication Technologies (ICT) in Jordan has been actively pursued over the past few years and it will continue to drive growth in the ICT services sector. The 2004‐2007 National Strategic Plan for ICT and postal sectors provides the basis for introduction in 2005 of full liberalisation of fixed telephony, a fourth mobile phone operator, and the successful privatisation of Jordan Telecom. These developments create huge business and investment opportunities to meet the increasing demands of the network.

Law n°13 of 1995 concerning telecommunications opened up the sector as a whole (except for fixed telephony), providing for the creation of two mobile phone networks, two public phone companies, and ten internet providers.

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An independent regulatory authority, the “Telecommunication Regulatory Commission (TRC)”, has been set up. It monitors operators’ activities, the network, and awards new licences. The government continues to liberalise telecommunications, following opening of the fixed telephony market on 1 January 2005, and it grants significant tax incentives in order to encourage investment in ICT.

In addition to infrastructure (automatic commutation and broadband networks), several public initiatives were launched, such as REACH (a government‐business partnership) and the national strategy to make Jordan a leader in export of ICT goods and services. This program has received support from newly‐launched start‐up incubators, an ambitious e‐administration initiative, the promotion of electronic trade, the “Broadband Learning and Educational Network project” linking eight public universities, 3200 public schools, 23 community colleges and 75 knowledge stations.

The national operator Jordan Telecom Company (JTC) held a monopoly on fixed telephony until December 2004, when the government sold 58.5 percent of its holdings in Jordan Telecom Company to the Joint Investment Telecommunications Consortium (JITCO), 88 percent of which is held by France Telecom and 12 percent by the Arab Bank Ltd. Three subsidiary companies have been set up by France Telecom: MobileCom for cellular telephony, Wanadoo as internet provider, and E.dimension for online services. The governmentʹs remaining shares, amounting to 41.5 percent of JTC stock, will be sold by the end of 2006.

Since opening of the fixed telephony market, the Telecommunications Regulatory Commission has approved nine class licenses and one individual license. Some licensed companies have started to establish their own international portals to facilitate

international calls service, thereby increasing competition on the international calls market.

The Jordanian mobile telephony market is the most competitive in the Middle East, with a competitiveness index of 84 percent as of end 2004, 17 percent more than in 2003. Nearly 1.6 million subscribers were registered in 2004, a penetration rate of 29 percent. Fastlink, originally a subsidiary of Orascom Telecom Holding, was the first mobile operator in Jordan (1995). Orascom sold its holdings to the Kuwaiti Mobile Telecommunications Company (MTC) in 2003 for US$ 550 million. Today four operators share the market: Jordan Mobile Telephones Services – Fastlink, Mobile Petra Jordanian Telecommunications Company – MobileCom, Xpress, and Mobile Umniah Company, which inaugurated its GSM network in June 2005.

Market potential for mobile telephony is estimated at more than 2 million users, providing that new investments are made and new products and services introduced.

As for internet, there are only eight providers (Access‐me, Wanadoo, Te‐Dated, Next, Batelco Jordan, Cyberia, Link and Middle East Communications) holding the 23 licences originally granted by the government, due to low growth in the sector. Indeed, the number of subscribers came to only 105,000 as of the end of 2004 (compared to 85,000 in 2003), a penetration rate of 2 percent in spite of 23.5 percent higher volume. This low market penetration is an opportunity for new investors to offer internet services through wire and wireless networks. The market has tended to stagnate because of the weak percentage of household data processing equipment, i.e. only 30.8 percent of households have a computer, and only 10.6 percent have an internet connection. To mitigate this problem, a free subscription service “Free Internet” has been made available by TE‐DATA and NEXT since the beginning of 2005.

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Additional information on the ICT sector is available as follows:

Ministry of Information Technologies: http://www.moict.gov.jo/MoICT/communication

ICT investment opportunities: http://www.moict.gov.jo/moict/MoICT_investment_opportunities.aspx

Business and investment opportunities in Jordan In spite of instability in the region, FDI inflows to Jordan continue to be considerable, and this trend is expected to continue in 2006‐2007.

Although major inflows have gone mainly to banking, retailing, mining, telecommunications and water treatment and desalination (the US$ 125 million Zara Ma’in Water Supply project and a US$ 167 million BOT contract for the construction of a wastewater treatment plant at As‐Samra), even more promising opportunities are in the pipeline, notably in the framework of the privatisation agenda (postal services, electricity companies GEGCO, EDCO & IDECO, the Zarqa oil refinery, Royal Jordanian Airlines) as well as the BOO (future power station with combined cycle in Amman) and BOT projects (Dead Sea and Red Sea channels, expansion of the Queen Alia Airport, the Amman‐Zarqa Light Railway project).

Thanks to multiple bilateral agreements, Jordan has become one of the most open economies. Setting up business in Jordan offers prospects not only for expansion on the local market, but also to neighbouring countries, thanks to re‐exporting platforms. Jordanian authorities are also encouraging investments by promoting special conditions for foreign investors at the 13 special economic zones (QIZ). Launching of the QIZ has met with real success despite suppression of textile quotas on 1 January 2005, with more than US$ 82 million invested in 2005 compared to US$ 54 million in 2004. Since 1997, there have been more than US$ 600

million in investments and nearly 30,000 new jobs, including some 10,000 expatriates.

Information technologies are considered one of the most promising sectors in Jordan. The government has adopted a general policy based on taking all the practical steps to guarantee development of the sector in order to enable it to compete on an international level, attract local and international investments, create exceptional job opportunities and provide income from exports.

After liberalisation of telecommunications was launched in 1995, the Kingdom started implementation of an ambitious national plan to bridge the digital gap, REACH, which comprises actions in the areas of regulatory framework, enabling environment (infrastructure), advancement programmes, capital, and human resource development. The government passed a law in 1999 that provides for the establishment of general or specialised areas of information technology. It also allows foreign investors to establish technical centres or factories in these areas, opening the door to investment inflows, including the opportunity to link electronic tourism services, computer assembly, Arabisation of computer programs and establishment of hubs for information technology projects and e‐employment. An e‐government initiative was announced, as were efforts to computerise government work and use the most modern network systems in order to simplify government procedures and make them more responsive to the needs of citizens, the government and business as well as to save time, especially for investors.

Mining and extraction industries

The mining and mineral sector gives Jordan a major role on the world stage, representing considerable potential for growth. The Kingdom is the fifth world producer and exporter of potash and the fifth world producer/fourth world exporter of phosphates. Fertilisers (made from phosphate rock and potash) are the second

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most important export commodity, and cement production is the fourth largest industry. The mining sector is the country’s leading industrial activity (representing 60 percent in terms of value) and the third source of income. It contributed 10.8 percent to GDP in 2004 (up from 9.6 percent in 2003), generating total revenues of JD 876 million and representing 24.6 percent of the country’s exports. Mining projects are governed by the investment promotion law of 1995.

The Natural Resources Authority responsible for supervising exploration for minerals and for carrying out other mining related activities in the country has made considerable effort to address the potential of the mining/mineral sector. Jordan wants to foster growth in Jordanʹs mining sector by attracting foreign investment in the framework of this reform, expected to move ahead in 2006. Practically all mining projects located in the three development areas benefit from exemption from customs duty and tax reductions, under certain conditions.

Although new companies have been set up recently, the sector remains structured primarily around three venture companies: the Arab Potash Company ‐ APC (potassium crude salts from the Dead Sea), the Jordan Phosphates and Mines Company – JPMC, and the Jordan Cement Factories Company ‐ JCFC.

The end of the monopoly on cement production and distribution in December 2001, previously held by JCFC for 50 years, has involved liberalisation of cement production and its distribution network along with liberalised prices and opening of imports from foreign cement manufacturers. JCFC declared gross profits of US$ 74 million in 2004, while the Jordanian‐Kuwaiti Holding Co. (JKHC) announced the launching of a cement factory that forecasts US$ 200 million in potential exports of cement to the region, notably Iraq, Saudi Arabia, the Palestinian Territories and Syria.

Since 2003, the market for construction and public works has been enjoying a remarkable boom. A buoyant real estate market, expanding tourism sector, and pro‐business reforms are behind a surge in investor confidence in Jordan that has triggered a wave of major initiatives. Both domestic private sector investment and foreign demand underpin this favourable development. The war in Iraq in 2004 was behind the arrival of new Arab and foreign investors and the World Economic Forum (WEF) held at the Dead Sea in May 2005 ended with the signature of several agreements for implementation of major building projects in Jordan. The country’s political stability, existing infrastructure, strong services sector, and lowered banking interest rates have supported this growth.

Housing is an important sector in Jordan and needs for 2004‐2008 have been estimated at 31,000 additional units/year. The private sector is involved in the majority of these projects and the remainders are handled by the Housing & Urban Development Corporation (HUDC) that works under the Ministry of Public Works and Housing (MPWH).

Infrastructure and transport

The many infrastructure projects in the pipeline and/or under implementation include:

Real estate projects A number of large‐scale real estate projects have been launched:

The Al‐Abdali Urban Regeneration Project will convert a 34‐hectare military campsite into an integrated real estate development. The US$ 1.7 billion project will accommodate a wide range of land uses, including offices and apartments, a commercial centre and a variety of public amenities. The prime project anchors will be an Information Communication

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Technology (ICT) District and the American University campus.

The Zarqa Urban Development project (2500 ha) will feature construction of 7,000 residences, a shopping centre, a hospital, a school, roads, a water network and related facilities. Construction of this new city seeks to meet the need for housing due to a growing population. The cost of this first phase is estimated at US$ 930 million.

The Royal Metropolis project has two components: Jordan Gate and Royal Villages (construction of a Hilton hotel, offices, 400 villas, a school, a shopping centre, etc.) The total cost of the two components is one billion dollars.

Rail network The Ministry of Transport launched a call for tenders and pre‐selected six candidates for construction of a railway network in the framework of the long‐term (20‐25 years) “Master Plan for Railways in Jordan”. Many initiatives are awaiting the results of the study. Over the long term, the Jordanian government intends to connect Jordan’s rail network to Europe via Syria and Turkey, making freight traffic possible.

Construction of a tramway between Amman and Zarqa was launched for US$ 85 million on a BOT basis, to be completed by 2008.

In order to encourage development of chemical industries at mining sites as well as phosphate exports, the government recently decided to proceed with privatisation in two stages of the Aqaba Railway Corporation, to be transferred initially to a public shareholding company fully owned by the government, for restructuring. Then all or part of the government shares will be sold to a qualified strategic partner, to be selected through

international bidding. The Canadian company CPCS Transcom is the technical consultant.

The construction of two rail extensions to the Sheidiyya mines and Wadi at Aqaba are also planned. Implementation of these extensions is expected to take place through privatisation of the Aqaba Railway.

Road network The “Amman Development Corridor” project, divided into

three phases and involving the construction of a 40‐kilometre Amman Ring Road connecting the desert highway, the Zarqa eastern bypass, and the Zarqa‐Syria border highway. It also includes the relocation of the Amman Customs Depot as well as infrastructure and utility services for an inland port. The cost of this project is US$ 177 million, co‐financed by the EIB, the World Bank, and the Arab Fund for Social and Economic Development.

The “Irbid Ring Road” project involves construction of 30 km of roads and several bypasses at a cost of US$ 28 million.

There are three civil airports in Jordan: Queen Alia International Airport (Amman), Marka Civil Airport (Marka) and King Hussein International Airport (Aqaba). To meet the increasing volume of air traffic, a master plan has been launched for modernisation of the main airports, including expansion of Queen Alia International Airport. The US$ 700 million project will involve construction of new buildings and the two passenger terminals will undergo a full overhaul. A call for tenders on a BOT basis will be launched in 2006.

Textile and clothing industries

The textile and clothing industry is considered one of Jordan’s main industrial sectors, accounting for more than 30 percent of Jordan’s exports (US$ 708 million in 2004) and employing more than 55,000

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people. Jordan’s success story in the textile and apparel industry is based on creation of new industrial zones, partnership agreements with the European Union and the United States, the existence of a qualified labour force and Jordan’s exceptional geographic location.

The Qualifying industrial zones agreement, signed in 1996 between Jordan and the United States, has attracted much investment in Jordan from various parts of the world. In 2005, Jordan’s exports of apparel to the U.S. topped US$ 1.2 billion. Today, the majority of textile and clothing industries are concentrated in the QIZ, where 101 companies work. Production of textiles and clothing represents more than 90 percent of total production in the QIZ. In addition to the QIZ, the Jordan‐US Free Trade Agreement, signed in 2001, offers preferential duty‐free treatment for many apparel products and the rest will qualify for zero duty by 2010. This gives Jordanian manufacturers the flexibility to choose between FTAs or QIZs to manufacture duty‐free products.

Currently, Jordanian manufacturers serve leading companies such as Donna Karan, Gap, Ralph Lauren, Banana Republic, Hanes, Macyʹs, Victoria’s Secret, etc.

Tourism

Jordan, with its exceptional historical and cultural heritage, sees the potential of tourism in terms of its being a major source of foreign currency earnings. Today, the tourism sector is one of the country’s four largest sources of income (along with remittances from Jordanian expatriates, international assistance and the mining sector). It generated US$ 864 million in revenues in 2004 (7.5 percent of GDP) and US$ 1.5 billion in 2005 (10 percent of GDP). Since signature of the peace agreements with Israel in 1994, the Jordanian government has given priority to development of tourism in order to exploit the resources of its archaeological and tourist sites (Petra, Jerash, Madaba, Wadi Rum, the Red Sea, the Dead Sea, etc.). Volume of investment in the sector has increased. A

national strategy for tourism was launched recently, targeting a doubling of income from tourism to JD 1.3 billion by 2010, creating over 51,000 new job opportunities.

The majority of international hotels, such as the Hyatt, Meridien, Radisson SAS, Intercontinental, Days Inn, Holiday Inn, Sheraton, Marriott, Movenpick, Four Seasons, or Kempinski, etc. are already present in Jordan. The country is known for its calm and liberalism. It maintains diplomatic relations with all its neighbours and thus is affected by regional instability, but significant recovery took place in 2005, with 14 percent growth in tourist arrivals.

Jordan offers several kinds of tourism: cultural (archaeological sites such as Petra and Jerash), sports (diving), ecotourism (the Jordan Valley), religious (Mount Nebo, the site of Christ’s Baptism), health and well being (the thermal springs at Maïn and El Hemma and spa therapy centres), boating …, which have strong potential for development. Health tourism is a significant sub sector, generating US$ 700 million a year. In 2004, public and private Jordanian hospitals accommodated 120,000 patients from neighbouring countries, making Jordan a regional medical centre for the Gulf countries, with a health sector that provides high level services in terms of quality care (cardiovascular medicine, kidney transplants) at very competitive prices.

In terms of investment, foreign funds poured into tourist related projects in the Kingdom in 2005, amounting to US$ 4 billion (US$ 12 billion over the period 1996‐2003), including a new national museum financed by the Japanese International Co‐operation Agency (JICA) for US$ 10 million or hotel projects like Catholic Student Bay (US$ 500 million), the Ayla Oasis project (US$ 750 million), the Saraya Aqaba project (US$ 362 million), the Sun Days Water Park (US$ 60 million), the Aqaba Ishtar Kempinski Hotel (US$ 60 million), the Royal Metropolis ‐ Jordan Gate and Royal Villages of Amman (US$ 1 billion), the Dead Sea Holiday Inn Hotel

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(US$ 21 million), the Crowne Plaza hotel at the Dead Sea (US$ 49 million)…

In addition, there were a large number of investments in the “Aqaba Special Economic Zone Authority”, thanks to the ease of doing business and the quality of installations and infrastructures. Aqaba’s only airport, the “King Hussein Airport”, signed an Open Sky agreement last year with the EU under which several airlines started operations in Aqaba. Moreover, development of the eastern bank of the Dead Sea, entrusted to the Jordan Valley Authority, has attracted many investments in tourism, for a total of US$ 605 million in 2004.

Pharmaceutical sector

Established some thirty years ago, the pharmaceutical industry occupies a leading position in terms of production and exports, second only to the garment industry. With capital investment of over 400 million US dollars, the pharmaceutical industry has become an important source of exports, with threefold growth in overall sales, up from 68 million US dollars in 1991 to 226 million US dollars in 2004. Some 18 laboratories employ 8,000 people and the sector specialises and excels in producing branded generics in various forms: solids, semi‐solids, liquids, aerosols etc. as well as producing various products under license from multi‐national companies.

Four companies (Hikma Pharmaceuticals, Dar Al Dawa, Arab Pharmaceutical Manufacturing and Jordan Pharmaceutical Manufacturing) hold a 90 percent share of the market. The country is developing its role as a regional platform, thanks to its five research centres and proven expertise (industrial know‐how, highly qualified frameworks) in the production of specific medical products. Law n°80 of 2001 and law n°31 of 2003 relating to pharmacology and drugs provide for standardised recording of drugs and alignment to the new intellectual property regime.

Jordan is also capitalising on its accession to WTO rules for negotiating licensing agreements with foreign companies.

Several international laboratories have shown their interest by seeking industrial partners in Jordan. For example, the Jordanian company United Pharmaceutical Manufacturing Co recently signed a five‐year production contract with seven German companies for a value of approximately US$ 24 million. Dar Al Dawa, one of the four largest pharmaceutical companies, signed a licensing agreement with the Swiss world leader Novartis Pharma AG for packaging of 11 products to be sold on the local market. Several laboratories have received European Union and US Food and Drug Administration approval to export their products to these markets.

Agriculture and agrofood

Despite limited local raw materials, the food industry is the second most important sector in Jordan in terms of attracting FDI and, according to the Jordan Investment Board, the second largest in terms of national investment. The sector has experienced relatively recent development, a high proportion of companies having been created at the beginning of the Nineties. Even if today’s processes are easily mastered thanks to the high training level of national engineers and technicians, the food processing industry suffers from weak research and development.

There are major opportunities for the food processing industry to supply not only the local market but also regional and international markets. Considerable needs for equipment need to be met if agricultural production is to be developed and adapted to international quality standards, a pre‐condition to competing on export markets (especially the European Union), which have stricter regulations and standards.

Opportunities also exist in the following areas: calibration services, tinning and packaging, freezing and de‐hydration of dried fruits

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and vegetables, agricultural processing for the production of juice and tomato paste, chips and mashed potatoes, products derived from dates, asparagus drying and preserving, introduction of new crops such as medicinal and aromatic plants, expansion of floriculture production for the local and international market, irrigation systems, and production of animal feed...

A list of agrofood projects is available on the website of the UNIDO Investment Promotion Unit in Jordan:

http://exchange.unido.org/main2.asp?menu=MenuePopup5&ID=362&lan=en

Success story: Land Rover makes a strategic all-weather investment Land Rover, the leading British producer of off‐road vehicles, has opened at Maan, Southern Jordan, the first factory for the assembly of automobiles in the Hashemite Kingdom.

The US$ 100 million investment was made in partnership with the Jordanian Shaheen Business and Investment Group. The production unit is an assembly facility which imports the different parts of the vehicles directly from the United Kingdom. Initially, the annual production capacity was planned to be of 5,000 cars and the Land Rover Defender constituted the only model assembled. In a second stage, the capacity was to be increased to 10,000 vehicles per annum and new models would be added to the catalogue, including the Freelander and the Discovery. At least 500 new employment opportunities, including 100 for engineering positions, were expected from this investment.

The Jordanian partner, the Shaheen Business and Investment Group, brought the majority of the capital, while Land Rover’s contribution to the JV consists mainly in its know‐how and managerial, technical and logistical support. Shaheen Business and Investment Group is one of the large Jordanian conglomerates and,

through its subsidiary, the Ole Automotive Trading Company, it was already the exclusive distributor for Land Rover vehicles in the Kingdom.

Until then, Land Rover sold all its vehicles throughout the Middle East region thanks to its local network of importers and distributors who imported the vehicles direct from the group’s factory based in Solihull in England. According to Bill Begg, Land Rover’s Regional Director for Middle East‐Africa, the objective is to make Jordan a strategic supply centre for the rest of the region.

Lebanon

Overview

References

Capital Beirut Surface area 10,452 km2 Population 4,500,000 inhabitants Languages spoken Arabic, French, English, Armenian GNP (dollars) 22,3 milliards (WDI 2005) GNP/per capita (dollars)

US$ 6,033; (6,932 in ppp.) ‐WDI 2005

Religions Muslims (70 %), Christians (30 %) National days 22 November (independence in 1943) Currency (March 2007) Lebanese Pound (LBP).

1 Euro = 2.04LBP – 1 US$ = 1.53 LPB. Association agreement with EU

Signed on 17/06/2002; implemented on 1/03/2003 EU web site: http://www.dellbn.cec.eu.int

WTO membership Observer since 1999

Economic profile

Located at a strategic geopolitical crossroads situated on the eastern coast of the Mediterranean Sea, Lebanon has an area of 10,400 sq km (4,015 sq mi), extending 217 km (135 mi) NE–SW and 56 km (35 mi) SE–NW. It is bordered bordered on the North and East by Syria, on the South by Israel and on the West by the Mediterranean Sea. Lebanon ‐ land of the Cedar ‐ has been on the fringes and at times right at the heart of the Middle East conflict. After 15

devastating years of civil war (1975‐1990), Lebanon has had to overcome difficult post‐conflict reconstruction challenges while trying to reconcile economic revival and better macroeconomic fundamentals. A comprehensive reform process in the areas of economic policy, industrial and agricultural modernisation, improved investment climate while the opening of the domestic market is under way to help the country regain its past glory as a leading financial power in the region, “the Switzerland of the Middle‐East”.

The rebuilding of Lebanon was following a promising path when the attack against Prime Minister Hariri (February 14, 2005) destabilised the country, creating a regional crisis which widened further with the Summer 2006 conflict launched by Israel. Investor confidence now seems discouraged for long.

Before these dramatic developments, the Lebanese economy knew a sustained growth, drew in particular by the rebuilding from the country after 15 years of civil war. A strong and rehabilitated financial sector supported substantial growth in production levels and a fivefold increase in GDP in 15 years (US$ 22.3 billion in 2005).

However, cumulative public debt rose dramatically to a high US$ 39 billion in June 2006. At the end of 2006, official figures revealed a public debt over GDP ratio above 200%.. In an attempt to reduce the ballooning national debt, the Rafiq Hariri government began an austerity program, reining in government expenditures, increasing revenue collection, and privatizing state enterprises, but economic and financial reform initiatives stalled and public debt continued to grow despite receipt of more than $2 billion in bilateral assistance at the Paris II Donors Conference. The Israeli‐Hizballah conflict caused an estimated $3.6 billion in infrastructure damage in July and August 2006, and internal Lebanese political tension continues to hamper economic activity., The international community,

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including several EU member states, agreed at the successful Paris III donor conference to provide Lebanon with some relief from its very high debt burden and other economic problems. Consequently, Lebanon received financial assistance amounting to $ 7.7 billion, 20 percent of total debt.

The services sector accounts for the highest share of GDP (72.3 percent), but agriculture and industry also play an important role. Banking is an important part of the Lebanese economy, with added value estimated at 4.5 percent of GDP in 2003. Tourism contributes significantly to both GDP growth and employment. Agriculture accounts for 6 percent of GDP and employs 10 percent of the labour force and it is estimated that around 30 percent of the population lives directly or indirectly from the jobs and activities it generates. Industry counts for 20.8 percent of GDP.

With limited mineral resources and a small industrial sector, the Lebanese economy greatly depends on imports. 90 percent of consumer goods are imported and the foreign trade coverage rate was 22 percent in 2005, with a structural deficit in the trade balance (15 percent of GDP). In 2005, imports cost US$ 1.747 billion while exports earned only US$ 189 million. The main imports are agricultural and food products, fuels, mining products, mechanical/ electrical/ electronic equipment and chemicals. Lebanon exports mainly jewellery, mechanical and electrical products, metals, chemicals and agricultural/ food products.

The European Union is Lebanon’s primary trading partner (source of 40 percent of imports and destination for 9 percent of exports in 2005). Lebanon’s main suppliers are Italy (9.4 percent), France (7.8 percent), Germany (7.8 percent), China (7.6 percent) and the United States (5.9 percent). Its main customers are Arab countries, notably Iraq (14.6 percent), United Arab Emirates (8.3 percent), Jordan (7.7 percent), Saudi Arabia (7.2 percent) and Turkey (7.3 percent).

Thanks to a long tradition of an open market, Lebanon has maintained close links with the Arab world, the United States and Europe. A member of the League of Arab States, Lebanon benefits from massive financial transfers and capital inflows from the Diaspora of 15 million Lebanese living abroad. Aside from large‐scale infrastructure projects, the government has always taken care not to intervene in the private sector, which accounts for 90 percent of GDP.

An interim agreement on trade and trade‐related provisions signed in July 2002 and in force since March 2003 governed trade relations until the Association Agreement took effect on 1 April 2006. The Association Agreement establishes the conditions required for progressive and reciprocal liberalisation of trade in goods, with a view to establishing a bilateral free trade area. It includes relevant provisions on customs cooperation, competition, protection of intellectual, industrial, and commercial property, and services. As a result, since 1st March 2003, Lebanese industrial and most agricultural products enjoy free access to the EU market (within the limits of tariff quotas), while the progressive elimination of tariffs on imports to Lebanon are scheduled to kick in between 2007 and 2015. These products include minerals, chemicals, wooden and leather products, textiles, jewellery, low‐value metals, machinery and electrical components and transport facilities. Imports of certain agricultural and agrofood products (protocols 2 and 3) are limited in terms of volume and weight in order to protect national agriculture.

Lebanon’s exports of agricultural goods and fishery products cannot freely enter European markets. Negotiations on the liberalisation of agricultural, processed food and fishery products will begin in due course in the context of the Rabat roadmap and the Euromed liberalisation work programme, leading to establishment of a free trade area in 2010. More specifically, the

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products included in chapters 1 to 24 of the Lebanese Tariff Charter benefit from progressive tariff dismantling.

FDI is low compared to portfolio investments by the Diaspora and Arab countries, attracted by high remuneration rates, whereas the country fundamentally needs productive investments to support the extension and modernisation of supply capacities (leading to economic growth and job creation) and to prevent expatriation of skilled labour.

According to UNCTAD’s World Investment Report, FDI in Lebanon were on a virtuous path (US$ 2.5bn in 2005, vs. 250 million on average during the 1997‐2003 period) before the 2005‐2006 events. Nearly 83.2 percent was invested in the services sector (mostly real estate), 12.4 percent in industry, and 4.4 percent in agriculture.

Saudi Arabia is the leading Arab investor in Lebanon (38.4 percent of total), followed by Kuwait (22.5 percent) and the United Arab Emirates (22.3 percent). Over the period 1995‐2004, Arab investments in Lebanon amounted to US$ 4.7 billion, putting Lebanon in first place on the list of Pan‐Arab investments (17.8 percent of total). French, Italian, German, British, Korean, and Finnish companies have won most of the government contracts in the fields of electricity, water, and telecommunications, and for the Sports City Centre and Rafiq Hariri Airport (Beirut International Airport BIA) projects. US companies have won contracts for processing of solid waste and landfill as well as a number of contracts in the power sector, air transport (radar equipment for BIA), and media (equipment for the national broadcaster Radio Lebanon).

As part of its strategy to integrate Lebanon into the global economy and modernise the domestic economy, the government has been working to revamp the policy governing competition to conform to

international practices. Hence, the government has developed a five‐year action plan with a budget of US$ 7 million.

This plan calls for new modern legislation to govern competition, the establishment of a competition authority, and the creation of a new enabling environment by removing all obstacles to trade and investment; elimination or reduction of corporate costs and revision of subsidies to farmers; launching of micro‐credit programmes for rural companies; improvement of guarantee schemes for SME loans and development of clusters for companies with growth potential, e.g. in tourism, jewellery and agricultural processing industries.

The plan includes accompanying measures: structural reforms for the improvement of the legal, administrative and regulatory frameworks (promulgation of customs legislation, trade law, social security requirements, competition law, and legislation governing State accounting) and reduction of bureaucratic red tape.

A comprehensive restructuring programme for companies has been launched in the framework of the EU’s “Euro Lebanese Programme for Industrial Modernisation”, seeking to improve the performance of Lebanon’s manufacturing companies. Thanks to the encouraging results of the first phase (2001‐2004), a second phase began in August 2005 with the main tasks of establishing ELCIM as a business support organisation providing ongoing advice and assistance to manufacturers to improve their performance on both national and international markets and facilitating access to long‐term financial resources.

The outgoing governmentʹs structural reform gave priority to privatising a number of utility companies, including telecommunications, electricity, water and transport. The 2000 Privatisation Law sets the framework for privatisation of State‐owned enterprises. Proceeds from privatisation are slated to bring

Invest in Lebanon

in US$ 10 billion over the period 2003‐2007, to be assigned entirely to debt repayment.

In conclusion, according to the World Bank (2006 CAS Report), “the country has strong comparative advantages that should allow much faster longer‐term real GDP growth of more than 5 percent per annum. These advantages include: strong entrepreneurial skills, skilled human resources, an open economy, a favourable geographic position, and a modern financial sector able to attract a high level of foreign investment, all of which will help provide Lebanon with a base for future growth and the development of a modern, competitive, and outward‐oriented economy.”

Country risk

Rating agencies have a rather diversified vision of Lebanon risk, according to the importance given to positive (potential for growth) or negative factors (debt, political deadlock):

At the end of January 2007, following Paris III pledges, Fitch affirmed Lebanon’s ratings at B‐“with stable outlook; S&P confirmed Lebanon’s ratings a B‐ long‐term sovereign credit rating (placed on negative watch in July 2006)

In January 2006, Moodyʹs attributed a B3 rating to the country, quoting “massive debt burden, wide budget deficit and political fragility». The crisis following the build up in tension between Hizbollah and the rest of the Lebanese government is resulting in loss of confidence by the financial markets and explains Moodyʹs B3 rating ‐six levels below investment grade.

For EIU, the economic outlook is not necessarily affected by the current political blockade: «provided that the political situation is resolved, real GDP growth will pick up in 2007‐08. Nevertheless, the fiscal deficit will remain substantial, and the large public debt burden will continue to increase”. EIU provided the following estimate of the main country risks as of

March 2007: Sovereign risk, CCC; Currency risk, B; Banking sector risk, B; Political risk, CC; Economic structure risk, CC.

Key challenges

Lebanon has to face some serious challenges in the economic domain. It imports ten times as many goods as it exports in terms of value, which results in a trade balance with a large deficit. The unemployment rate is as high as 16%. Mineral resources (iron, coal, phosphates, salt) are limited.

Main black spot, State debt has reached a high point (180 % of GDP), despite austerity budgets in recent years.

The geopolitical situation of Lebanon, between Israel and Syria makes it very dependent on regional equilibrium and it is obvious that the prosperity of the country is closely linked to the return of peace to this region of the world. The attacks against high profile politicians and journalists, as well as the 2006 war by Israel in Southern Lebanon, have discouraged many investors at a time when confidence was coming back.

Strong points

Several factors help to contribute to providing Lebanon with a propitious environment for local and international investments. Indeed, with its liberal economic regime, it safe business environment, the wide access it gives to the markets of the Middle East and its extremely highly‐skilled labour force, the country can guarantee investors the very best conditions for the development of their businesses. Lebanon has several factors in its favour:

A geostrategic situation which provides access to a market of almost 300 million consumers.

The quality and the competence of human resources whose salaries are relatively moderate help them increase their productivity.

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An infrastructure in the country which has been completely rehabilitated and renovated during the past few years which enables them to lower the cost of their investments.

A system of guarantees for investments and the moderation of the taxation rates in force contribute to an increase in profit margins.

A financial system which provides for the free circulation of capital of all types, including profits and dividends.

A legal Lebanese framework exempt from discrimination between nationals and foreigners and a law which authorises non‐Lebanese nationals to possess the totality of shares in a Lebanese company.

Tourism occupies an important place in the economy. The mildness of the climate, the snow‐capped mountains, the valleys and the Mediterranean Sea explain the attraction that this country exercises on travellers. In the past the customers came from Europe and the USA, today they come in large majority from the Middle East and Europe.

Financial services, publishing activities, advertising and publicity, consulting are well‐reputed and continue to develop. The country is the leading producer of advertising spots in the Middle East.

Recent years were marked by the arrival of foreign investments of Arab origin which registered the greatest growth over the past ten years with a volume that reached 650 million American dollars, according to the annual report of the Arab Agency for Investment Guarantees. Concerning the distribution of FDI per sector, 85% of investments concern the tertiary sector (hotels, shopping centres, etc.). Saudi investments represented 53.8% of the total in 2002, followed by the United Arab Emirate projects (29.3%) and Kuwaiti (15.4%). Lebanon occupies the second place among Arab countries on the foreign direct investment level and benefited from 22.3% of

the total of Inter‐Arab investments in 2002, while this rate was around 8.5% in 2001 and 19.3% in the year 2000.

The Investment Development Authority for Lebanon (IDAL) IDAL was established in 1994 by a decree from the Lebanese Council of Ministers to spearhead Lebanonʹs investment promotion efforts. On August 16, 2001, IDALʹs role was reinforced by the enactment of the Investment Development Law 360, regulating investment promotion of domestic and foreign entities and striving to stimulate Lebanonʹs economic and social development as well as enhance its competitiveness.

The IDAL offers a wide range of services whose aim is to promote investments as well as to facilitate, accelerate and simplify the process of their implementation. The IDAL is responsible for a number of activities:

IDALʹs scope of work entails the following functions:

‐Identifying and promoting investment opportunities in Lebanon;

‐Disseminating market intelligence about Lebanon, the business, legal and investment frameworks as well as other relevant information;

‐Facilitating the registration and issuance of permits and licenses required for any investment project;

‐Providing ongoing support for investment projects once established;

‐Identifying potential joint venture partners and strategic allies for Lebanese businesses; and

‐Advising the Lebanese government on investment policy issues.

Web: http://www.idal.com.lb/

Invest in Lebanon

How to invest in Lebanon Lebanon has traditionally been a country open to foreign direct investment. Over the last three years, the GOL passed several laws and decrees to encourage investment. There is no specific legislation on foreign investments, but all aspects of setting up a business are governed by the Lebanese Commercial Code and Regulations and the Investment Development law n°360 of 16 August 2001.

A foreigner can establish a business under the same conditions that apply to a Lebanese national, provided the business is registered in the Commercial Registry. A foreigner must first obtain residence and work permits before registering his or her business. There are no sector‐specific laws on acquisitions, mergers, or takeovers, except for bank mergers.

Lebanese law does not differentiate between local and foreign investors, except in the area of land acquisition. Several types of companies can be created: joint stock companies (Société Anonyme Libanaise ‐ SAL), limited liability companies (Société à Responsabilité Limitée ‐ SARL), partnerships limited by share (Société en Commandite par action ‐ SCPA), holding companies, offshore companies, partnerships, joint ventures, or agencies/branches of foreign companies.

For limited companies (SARL), minimum capital of LBP5 million (US$ 3,300) must be wholly paid in before registration. At least half of the administrators must hold Lebanese nationality. Banking, insurance and air transport activities cannot be registered as SARL companies.

A joint stock company (SAL) must have a minimum of three shareholders and capital of at least LBP30 million (US$ 20,000), with one‐fourth paid in by the time of registration.

These two kinds of companies pay 15 percent tax on corporate profits. For commercial representation, SAL capital must consist of registered shares held mainly by Lebanese stockholders and 2/3 of capital in a limited liability company must be held by Lebanese nationals.

In the case of a subsidiary company, capital must be held mainly by Lebanese nationals and authorisation from the Council of Ministers is required. In the areas of banking, insurance, capitalisation, savings, capital placement and air transport, limited liability company status is not an option. Branches and subsidiaries of foreign companies set up in the form of SAL or limited partnerships as well as foreign insurance companies must, in addition to the usual procedures, obtain authorisation from the Ministry of Economy and Trade. It should be noted that holding companies, which must have the legal status of a Lebanese limited company, is exempt from income tax as well as tax on distribution of profits.

An offshore company can have its headquarters either in Lebanon or abroad, but by definition it operates outside the country. Offshore companies are structured like joint stock companies. However, there is an additional documentation requirement for a bank guarantee in the amount of LBP 100,000 (US$ 660), automatically renewable, as security against payment of annual taxes. Offshore companies, like holding companies, receive special tax treatment due to their limited status as well as abatement of 30 percent of taxes on foreign employees’ wages.

Law n°296 of 3 April 2001, which amended a 1969 law (n°11614), governs foreign acquisition of property. The new law eased legal limits on foreign ownership of property (meant to encourage investment in industry and tourism), abolished discrimination between Arab and foreign nationals with regard to property ownership, and lowered real estate registration fees from six

Invest in Lebanon

percent for Lebanese and 16 percent for foreigners to five percent for both Lebanese and foreign investors.

The law permits foreigners to acquire up to 3,000 square meters of real estate without a permit and foreigners can acquire more than 3,000 square meters with Cabinet approval. Cumulative real estate acquisition by foreigners is not to exceed 3 percent of total land in each district. Cumulative real estate acquisition by foreigners in the Beirut region is not to exceed 10 percent of total land area. The law prohibits acquisition of property by individuals not holding an internationally recognised nationality. This is relevant primarily to Palestinian refugees residing in Lebanon.

A 2001 law on investment promotion was enacted to promote opportunities and encourage investment in the fields of industry, tourism, agriculture, and food processing industries, marine resources, media, and information technologies. It established a ʺone‐stop shopʺ service at the Investment Development Authority of Lebanon (IDAL) to facilitate procedures and better assist investors. However, these measures have had limited impact so far on competitiveness and administrative procedures for doing business are still too lengthy and burdensome. There are no special financial provisions for or constraints on foreign investors except that certain restrictions exist on foreign ownership of banks and companies involved in media activity, land ownership, and the employment of foreign labour.

Lebanonʹs membership in the Multilateral Investment Guarantee Agency (MIGA) is a means of building confidence among potential foreign investors. In addition, the National Institute for the Guarantee of Investments makes insurance coverage available to investors, providing compensation for losses resulting from non‐commercial risks. Commercial and civil companies must register at the Civil Companies Registry at the Court of First Instance. Foreign companies can operate in Lebanon either as a branch or as

representational office, both of which must register and obtain a license in order to do business.

The national preference for recruitment of Lebanese staff applies to trade and the exercise of certain activities (public office, bank clerk, waiter, hairdresser, engineer, etc.) is reserved for citizens of Lebanon. This is also the case for retail and distribution, television and radio, armaments and all strategic activities related to national security, all off limits for foreigners. In the newspaper industry, licences are granted only to Lebanese residing in Lebanon. In banking, capital must be held mainly by Lebanese nationals. Moreover, the acquisition of shares requires the prior authorisation of the Central Council of the Bank of Lebanon.

Companies are subject to 15 percent tax on profits. All interest, dividends, and arrears are subject to a 10 percent tax rate. Special provisions and exemptions apply to holding companies and offshore companies. The new 2001 Investment Development Law, which divides the country into three investment zones, also provides for tax exemptions. A system of excise duty is applied.

VAT was introduced on 1st February 2002, replacing several pre‐existing taxes. It applies to both domestic and imported products, at a single flat rate of 10 percent. The law foresees exemptions for several categories of goods and refund schemes have been set up applying, for example, to tourists and foreign businesses. A VAT Directorate was created within the Directorate General of Finance. Tax exemptions are available to companies located in the nine free trade zones (of which Beirut and Tripoli are already operational) and tax exemptions are granted to educational establishments, farmers, and airline and maritime companies.

The Lebanese government recognises the importance of foreign investment and is actively working to provide a more conducive environment that enables investors to bring or establish their operations in Lebanon. Within this framework, Investment

Invest in Lebanon

Development Law 360 empowers IDAL to offer a wide range of investment incentives, depending on the qualifications and criteria for each project.

With respect to the Investment Development Law, IDAL categorises investment projects according to geographic location, sector, investment cost, and other criteria. Sectors include industry, agriculture, agro‐industry, tourism, information technologies, telecommunications technologies, and media. The new Investment Development Law 360 of 2001 divides Lebanon into three investment zones: A, B and C. Incentives for investment projects are based on the investment zone in which the project is classified.

Projects in zone A will benefit from exemption from income tax for two years (from the date on which shares are listed on the Beirut Stock Exchange), provided that the negotiable shares represent no less than 40 percent of overall company capital.

Projects classified in zone B will be exempt from income tax for two years from the date shares are listed on the Beirut Stock Exchange, provided that the negotiable shares are no less than 40 percent of overall company capital. This exemption period is in addition to any other exemption period for which the company qualifies and an additional 50 percent reduction in income taxes and taxes on project dividends is provided for a period of five years.

Projects classified in zone C (areas that the government intends to develop) will benefit from exemption from income tax for two years (from the date its shares are listed on the Beirut Stock Exchange), provided that the negotiable shares constitute no less than 40 percent of overall company capital. This exemption period will be in addition to any other exemption period enjoyed by the company. They also benefit from a full 10‐year exemption from income tax and taxes on project dividends, the reduction applying from start‐up of operations as governed by the terms of this law. If

an investor qualifies for the above‐mentioned exemptions (tied to listing on the Beirut Stock Exchange), any applicable reduction will kick in following the end of the period of exemption.

New provisions were included in the 2003 law, extending these advantages to investments with particular economic impact on social and environmental issues, technology transfer or provision of technical training, the establishment of research & development centres and/or development of software and hardware for ICT projects.

The Package Deal Contract is a grouping of special incentives, exemptions and reductions available to investment projects, bound by a contract stipulating the specific terms, rights and obligations of both IDAL and the investor. Projects benefiting from the package deal will be granted full exemption of profits from income tax for a period of 10 years from start‐up of project activities. Foreigners can obtain work permits provided that the interests of the local labour force are covered by employing at least two Lebanese nationals for each foreign employee. A 50 percent reduction in fees is applied on foreign labour work and residence permits. Joint‐stock companies planning to implement and/or manage an investment project are exempt from the obligation of having Lebanese nationals or members of the legal profession on their board of directors. They also benefit from a reduction of up to 50 percent on construction permit fees for project facilities and full exemption from fees related to land registration, provided that project operations begin within five years.

Other laws and legislative decrees provide for tax incentives and exemptions, depending on the type of investment and its geographic location. Industrial investments in rural areas qualify for six or ten‐year tax exemptions, depending on specific criteria (Law n°27 dated 19 July 1980, Law n°282 dated 30 December 1993 and decree n°127 dated 16 September 1983). Exemptions are also

Invest in Lebanon

available for investment in southern Lebanon, Nabatiyah and the Biqa (Decree n°3361 dated 7 July 2000). For example, new industrial establishments manufacturing new products are eligible for a 10‐year exemption from income tax. Factories currently located on the coast that relocate to rural areas or southern Lebanon, Nabatiyah and the Biqa qualify for a six‐year exemption from income tax. However it should be noted that investments pertaining to the ICT sector are not governed by the zoning requirements as are other types of investments. An investment in ICT regardless of the zone is treated the same.

The Government grants a tax reduction of 5 percent on dividends, applicable to: (a) companies listed on the Beirut Stock Exchange (BSE); (b) companies that open up 20 percent of their capital to Arab companies listed on their national stock exchange or foreign companies listed on a stock exchange in an OECD country; and (c) companies that issue GDRs (Global Depository Receipts), with a minimum 20 percent of shares listed on the BSE. Exemption from customs duty is available to industrial warehouses dedicated to export. Companies located in the Beirut Port or Tripoli Port free zones benefit from a 10‐year corporate tax holiday and are not required to register their employees with the social security service as long as they provide equal or better benefits.

Foreign‐owned firms have the same investment opportunities as Lebanese firms. Lebanon has two free zones in operation: Beirut Port and Tripoli Port. Reconstruction of a 120,000 square meter free zone at the Port of Beirut has been completed and a 6000 square meter bonded warehouse facility is now available. The new, WTO‐compatible customs law issued by Decree n°4461 dated 15 December 2000 fosters the development of free zones.

Lebanon has adopted legislation on intellectual property and royalties in conformity with WTO requirements, although enforcing the laws has been lax.

Finance & banking in Lebanon The financial sector is bank‐centric, generally acknowledged to be exceptionally large and relatively stable. Lebanon has liberal codes for capital and money market transactions, with no restrictions on either inflows or outflows. The country has an open foreign exchange market, full currency convertibility, and unrestricted repatriation of capital. A 1956 law introducing absolute bank secrecy to protect depositors and investors and law n°318 of 2001 outlining anti money laundering measures have been promulgated.

The Central Bank supervises and regulates the banking system. Since 1998, commercial banks have been required to meet a minimum capital adequacy ratio of 12 percent, obligatory reserves corresponding to 10 percent of annual profits, and systematic recourse to the provisioning of non‐performing loans in line with the Basle II Agreement. Banking capital has increased substantially and by the end of 2001, the average capital adequacy ratio of commercial banks came to about 16.18 percent. Banks are required to draw up financial statements and auditors must publish consolidated and audited financial statements annually.

As of February 2004, the sector consisted of 63 active commercial banks. Lebanon’s 63 banks in fact have greater means at their disposal than the national economy, with assets three times higher than GDP. Activity is strongly concentrated at 16 banks, which control 80 percent of the market.

By the end of September 2005, total assets at Lebanon’s five largest commercial banks amounted to some US$ 39.8 billion, 58 percent of total banking assets. The country counts 10 specialised medium and long‐term loan institutions, 28 financial institutions, 8 financial

Invest in Lebanon

intermediaries, and 3 leasing companies. The financial intermediation level is equivalent to around 240‐250 percent of GDP, reflecting the considerable weight of the banking sector. The Bank of Lebanon (the country’s Central Bank), however, encourages bank mergers to boost regional competition. It intends to push for consolidation of the sector, which is considered to be too fragmented. Over 25 bank mergers have taken place in the past decade and additional mergers are expected following Parliament’s approval of revised legislation governing bank mergers.

Lebanese banks are increasingly turning to retail banking activities, one component being bank insurance.

Islamic banks were recently authorised in Lebanon, under a law dated 11 February 2004, supplemented by two circulars from the Central Bank of Lebanon dated 30 August 2004, which grant certain incentives. This opening to Islamic banks is mainly dictated by the already considerable flow of Arab capital to Lebanon. The Crédit Libanais set up a subsidiary in 2005 specialised in Islamic banking services. This new entity has capital amounting to US$ 20 million.

Nearly 10 foreign banks are active in Lebanon, notably Banque Audi (Swiss), Commerzbank, Crédit Suisse, Dresner Bank, HSBC, Intesa S.P.A, the Bank of New York, JP Morgan Chase, and the Arab Banking Corporation. Subsidiary companies of French banks ‐ BNPI (BNP Paribas), the Lebanese‐French Bank and Fransabank (Calyon), SGBL (General Company) ‐ play an important role. In addition, banks have promoted a strategy for regional expansion by opening branches in Syria, Jordan, Sudan and Algeria. BLOM (Lebanonʹs largest bank) has recently acquired 99 percent of Egypt’s MISR Romanian Bank (MRB).

Insurance activities are regulated by the 1968 Insurance Law, which sets up a specialised Insurance Department with supervisory responsibilities at the Ministry of Economy. Amendments to this law in 1999 introduced an increase in minimum capital required,

the introduction of a solvency margin corresponding to 10 percent of gross premiums and an increase in the minimum technical provisions required per line of business. Newly licensed companies must specialise in either life or general insurance.

The Beirut Stock Exchange (BSE) is quite dynamic, with market capitalisation amounting to US$ 3.45 billion at the end of 2004, compared to US$ 1.24 billion in 2001. This is 86.7 percent growth in three years, sustained by the introduction of 12 sovereign Eurobond issues (eleven in US$ and one in EUR). There are 16 traded companies and about three quarters of operations involve Solidere shares. This is one of the largest publicly held companies in the region, in charge of rebuilding downtown Beirut. The Beirut Stock Exchange plans to set up a securities and exchange commission and in 2005 launched around‐the‐clock trading and electronic transactions.

The government attaches great importance to development of the financial market and reforms are under study to increase its contribution to financing of the economy, in particular the possibility of quoting privatised company shares on the stock market, development of the insurance sector and life insurance products, and other institutional investors who could play a major role in making the capital market more dynamic.

Telecom & internet in Lebanon The sector is divided between a fixed telephone network managed by the traditional public operator OGERO and two mobile telephony networks originally developed by Cellis (the France Telecom Group) and LibanCell on the basis of BOT (Build‐Operate‐Transfer) contracts.

The government decided at the end of 2002 to put an end to the two contracts and to sign new contracts with MTC Touch and Fal‐

Invest in Lebanon

Detecon (Alpha Network), which manage the mobile telephony network on behalf of the State.

The sale of 40 percent of State shares in the public company Lebanon Telecom (another name for Ogero) is envisaged by 2009 and it is expected that a second fixed telephone operator will enter the market in 2009 after the end of Liban Telecom’s three‐year period of exclusivity.

Eleven official internet service providers (ISP) share the market for internet access, with a penetration rate estimated at 17.5 percent (approximately 700,000 subscribers).

Recently, high‐speed broadband internet services have been authorised for ISPs and internet users, available periodically, for example at the technopole of Berytech. On the other hand, voice over IP and video conferencing are illegal in Lebanon.

The ICT sector continues to benefit from private investment and Lebanon offers high profits, thanks to its comparative advantages, its highly qualified and polyglot labour force, and a very dynamic advertising market.

Lebanon is the primary producer of TV ads in the Middle East as well as a media and broadcasting leader, providing digital content throughout the Arab world.

The Lebanese State has announced construction of a development complex to accommodate ICT companies at Damour, specialised in electronics, computer equipment, software, and biotechnology. The total cost of this project, initiated and supported by the American organisation USTDA, is estimated at 30 million dollars.

Business and investment opportunities in Lebanon According to UNCTAD’s “Investor Perception Survey”, there are investment opportunities in Lebanon in the following sectors:

Tourism: Arab tourism, health and wellness tourism, convention and business tourism, amusement parks, etc.

ICT: software development, common services, back office services, call centres, etc.

Industry: agro‐food, furniture, jewellery, cosmetics, clothing, paper and packaging, etc.

Agriculture: fruits & vegetables, organic products, dairy products, tobacco, olive oil, wine, canned fruits, honey, etc.

Health & education: private schools and universities, cosmetics, healthcare services, etc.

Financial and professional services: insurance, communication, advertising, financial services, consulting services, etc.

The majority of foreign investments go to tourism and real estate (luxury hotels, villas, etc.), mainly catering to wealthy Arab tourists suddenly wary of travelling to the US or Europe. But the current wave of reconstruction is taking away from investment in pharmaceuticals, security, construction, education, franchising, and services. Many Lebanese private individuals and corporations are looking for safe investment opportunities overseas.

Lebanon’s real estate sector is surging, driven by an influx of overseas investment. Construction fever in downtown Beirut and neighbouring districts (Kantari, Gemmayze, Wadi Abou Jmil, Clemenceau‐Ain Mreisseh) these past few years has now spread to other residential districts of Beirut (Achrafieh, Ramlet El Baida, Verdun and Raouche).

Apart from ongoing large‐scale construction projects along the shoreline and downtown (the Platinum Tower, Beirut Tower I, Marina Towers, Four Seasons Hotels, the Hilton Hotel, the jewellery market) for a total value of US$ 1 billion, more than thirty new tourist and luxury residential projects worth more than US$ 1

Invest in Lebanon

billion are scheduled to be launched by the end of 2006. The Kuwait‐based Al Sayer Group and its subsidiary Al Dhow Investment Company announced that they would be launching a real estate project in downtown Beirut at a cost of US$ 1 billion, called the Phoenician Village.

Profits earned by Solidere, the company established to rebuild downtown Beirut after the civil war, reflect the real estate boom. The company recorded net profits of US$ 108.5 million in 2005, double the previous year’s figure. Figures for 2005 are remarkably high, given the political turmoil in Lebanon following the assassination in February of former Prime Minister Rafik al‐Hariri, founder of Solidere.

The travel and tourism industry is a catalyst for construction and manufacturing. In Lebanon, capital investment for travel and tourism is estimated at US$ 455.1 million, accounting for 12.1 percent of overall investments in 2006. Capital investment for travel and tourism is expected to reach US$ 714.8 million, (11.8 percent of estimated overall investments in 2016).

Large international companies have been awarded contracts for future hotel projects like Campbell Gray, Hyatt, Express by Holiday Inn, Rotana and Intercontinental Hotels, which has signed an agreement with Hotels of Lebanon (SGHL) for construction in the countries of the Levantines (Lebanon‐Syria‐Jordan) of some 20 “Holiday Inn”‐category hotels over a period of five years.

Al Habtoor Hospitality Group has invested US$ 150 million in Habtoorland. This amusement park was inaugurated at the beginning of 2005 along with the Habtoor Grand Hotel Convention Centre & Spa, located in eastern Beirut. Other investments for five‐star hotels were announced in the district of Raouche, where promoters include the Horizon Development Company, affiliated with the Irad Holding Group (held mainly by the Hariri family) and the Kuwait Projects Company – Kipco ‐ (owned by the Kuwaiti

royal family of Sheikh Sabah El Ahmad El Sabah). Work is estimated at a cost of US$ 75 million and construction is expected to start in 2006. In addition, a US$ 150 million initiative to build a seaside and harbour complex in Damour (baptised “Port of Love”) is scheduled to be launched soon.

Beyond hotels, trade and leisure facilities (amusement parks, casinos, etc.), new activities are booming thanks to affluent customers interested in luxury activities, real estate and communications.

Lebanonʹs broadcasting scene is well developed, lively and diverse, reflecting the countryʹs pluralism. Beirut, home to a number of television and broadcasting studios, has found new opportunities to promote its know‐how in content production through internet. Several Arab portals are hosted in Lebanon and the country offers fairly good telecommunications infrastructure. Several business incubators have been set up to accommodate new start‐ups, along the lines of the Berytech technopole.

Lebanon has the human capital and educational system needed to develop “market niches”, for example software production, back‐office operations, call centres and “shared services” companies.

To support these activities, IDAL is launching the Beirut Emerging Technology Zone (BETZ), an ambitious initiative aimed at establishing a technology park, including a business incubator for start‐ups in ICT and other new technologies. There are plans for establishment of a technology incubator by the Lebanese National Council for Scientific Research as well as a technopole by the University of Balamand. A business incubator for start‐ups (Berytech) was established as early as 2001 by Saint Joseph University, which includes a business accelerator for start‐up companies and business hosting facilities for already established small and medium‐scale companies. Berytech has partnerships

Invest in Lebanon

with European countries and it is a member of the Network of European Technical Parks.

In addition, the privatisation process offers many opportunities, especially with the transfer of 40 percent of Lebanon Telecom’s fixed telephony lines (the longstanding sole operator) and other privatisation transactions scheduled for 2006, such as production and distribution of electricity, sale of 40 percent of EDL shares, rehabilitation/extension of Beirut’s commercial port and extension of Tripoli’s port, water management projects, municipal solid waste management projects, environmental and infrastructure projects such as airport renovation, upgrading and modernisation.

Several laws have been passed (oil production) or will soon be promulgated (pharmaceutical products) to remove import barriers.

Several factors have contributed to a more dynamic financial sector: growing opening of the economy, new trade agreements, the privatisation programme, and new regional opportunities following for example reform of the Syrian banking structure, in which Lebanese banks are already heavily implicated. In addition, a vibrant Beirut Stock Exchange makes it possible to handle online financial transactions with local and regional investors.

Many other productive sectors such as agriculture have great growth potential. Products such as fruits, vegetables, olives and olive oil, organic materials, mineral water, wine, etc. are well established on various export markets. A number of small projects in wine making, olive growing and dairy products are seeking to set up partnerships with foreign companies.

IDAL is launching the “Agro Plus” program to promote the agro‐industrial sector, focusing on products such as canned food and juice. Like Export Plus, it will provide subsidies and assist in improving quality, marketing, and production costs in order to penetrate new markets and increase exports.

Similarly, the textile industry (which produces yarn, cloth, socks, panty hose, towels, curtains, and carpets) suffers competition from cheap imports but maintains some 2500 factories. Mechanical industries, whose imports are increasing dramatically as the sector modernises its facilities and services related to the transport of people and goods, can be further developed.

Success story: Ipsos polls the Middle East from Beirut Ipsos, the survey and marketing group (EUR 857 million turnover in 2006) has been established in Lebanon since 1995, through the group’s acquisition of Stat, a local company which had been created in 1988. The new entity, Ipsos‐Stat, became the bridgehead of Ipsos for the whole of the region. Beyrouth‐based Ipsos‐Stat is now present, through an integrated network,,in Syria and Jordan as well as in the Gulf States (Bahrain, Kuwait, Saudi Arabia). To illustrate the company’s strategy of regional expansion, Ipsos Stat set up in the United Arab Emirates (Dubai) in 2003.

The strategy of Ipsos, which has its regional management centre in Lebanon consists in offering its range of expertise (marketing studies, advertising and media studies, opinion polls and social research, studies linked to client relations management) throughout the Middle East. In order to achieve this, the group which is listed on the Paris Stock Exchange, works with the local economic players (advertisers, public and public enterprises, media, etc.) and makes the most of the know‐how that it practices in thirty countries. As far as the measurement of advertising efficacy is concerned for instance, Ipsos underlines that the products developed and marketed in France (« Baromètre Affichage », « Suivi Télévision Cinéma », « Suivi Impact Presse) are as well available in Lebanon.

The number four company in the world for surveys is happy with the rapid expansion of its activities and in particular with its

Invest in Lebanon

Lebanese subsidiary in the domain of media and advertising. It has undertaken two major surveys for the audiovisual sector: National Media Analysis and TV Audience Measurement Survey. Ipsos, despite a fragile context in the region, nevertheless benefits from a strong growth rate (with an organic growth of 14% compared with the previous year), which underlines the strong potential of the Middle East markets.

Overview

References

Official name Great Socialist People’s Libyan Arab Jamahiriya

Capital Tripoli (1,3 million inhabitants) Area 1 760 000 km2 Population 2004 5.7 million Languages Arabic, 2ème language English.

Italian often spoken GNP 2005 (US$) 38.735 bn GNP per capita (2005) 6,800 US$ (11,629 US$ in ppp.) Religion Islam National days 1st September (1969 Revolution).

24 December (Independence Day) Currency (March 2007) 1 € = 1.77 Libyan Dinar (LYD)

1US$ = 1.33 LYD Association agreement with EU

Observer since 1999

WTO membership Observer since 2004 in view of membership.

Sources: FMI, Libya Country Report n°5/83, March 2005, Country Report n°06/136, April 2006 and IMF World Economic Outlook database.

Economic profile

Located in North Africa, Libya is the fourth largest country in Africa. Bordering the Mediterranean Sea, it has land borders with Tunisia, Algeria, Niger, Chad, Egypt, and Sudan. Libya is a member of the Arab Maghreb Union (AMU) and a founding member of the Organisation of African Unity (OAU).

Invest in Libya

From the earliest days of his rule following the 1969 military coup, Colonel Muammar al‐Qadhafi has espoused his own political system: the “Third Universal Theory”, codified in the Green Book. The system is a combination of liberalism and Marxism and is supposed to be implemented by the Libyan people themselves.

After more than ten years of international isolation due to the 1988 bombing of a Pan Am plane over the Scottish town of Lockerbie, the U.N. sanctions were suspended in April 1999 and finally lifted in September 2003 after Libya settled the Lockerbie claims and agreed to stop developing weapons of mass destruction. Kaddafi has made significant strides in normalising relations with western nations since then and has made progress on economic reforms as part of a broader campaign to bring the country back into the international fold. The country has huge potential for modernisation and foreign investments and is currently experiencing a business boom including oil and gas, thanks to plentiful high‐quality hydrocarbon reserves. Other major opportunities are in infrastructure projects, airports and ports, healthcare, tourism and education and training. Libya will need to make considerable progress in all these areas if it is to achieve its full potential.

Libya is generously endowed with energy resources, with one of the largest proven oil reserves in the world (39.1 billion barrels of reserves according to OPEC statistics and 1,500 billion m3 of gas reserves). Libya’s economy is heavily reliant on oil revenues but attempts are underway to diversify. Libya’s income from oil exports has increased sharply in recent years, posting US$ 28.3 billion in 2005 and forecast at US$ 31.2 billion in 2006, up from just US$ 5.9 billion in 1998. The rebound in oil prices since 1999, along with the lifting of U.S. and U.N. sanctions, have resulted in an improvement in Libyaʹs foreign reserves (US$ 31 billion as of June 2005), trade balance (a US$ 17 billion surplus in 2005) and overall economic situation.

In part due to higher oil export revenue, Libya experienced strong economic growth in 2003, with real gross domestic product (GDP) estimated to have grown by about 9.1 percent. Economic and financial conditions continued to be favourable in 2004 and 2005, with GDP growth of 4.6 percent and 3.5 percent respectively, projected at 5 percent for 2006 in the IMF’s annual economic review (the latest estimates by the EIU are more optimistic, around 8%). This level of oil revenue and a small population give Libya one of the highest per capita GDPs in Africa, posting US$ 6,800 in 2005. Soaring oil prices contributed to a significant increase in the external current account surplus, reaching about 15 percent of GDP. Oil export earnings increased by 47 percent to about US$ 29 billion and non‐oil exports, mainly petrochemicals, also grew markedly. Nearly 85 percent of oil production is exported, accounting for 95 percent of total exports and 60 percent of the country’s income. Kept down to OPEC’s quota, production has for several years come in between 1.3 and 1.4 million barrels per day, making Libya the second largest oil exporter in Africa. However almost US$ 30 billion in investments in oil exploration will be needed to bring production of hydrocarbons to 3 million barrels per day by 2010.

Imports grew by 24 percent to some US$ 11 billion, boosted by increased domestic demand. Overall, gross international reserves rose to about 32 months of imports (based on 2005 volume).

Libya’s main trading partners are the EU (mainly Italy, the United Kingdom, Germany and France), Maghreb countries, and Turkey.

Libya has begun to respond to international, political and economic pressure, adopting market orientated reforms and introducing initial liberalisation of the socialist‐oriented economy. Since settlement of the Lockerbie claims and lifting of international sanctions, many countries have re‐established dialogue with Libya. Kaddafi has affirmed his willingness to move towards economic

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reform, liberalisation and a reduction in the Stateʹs direct role in the economy.

In June 2003, he said that the countryʹs public sector had failed and should be abolished and called for privatisation of the countryʹs oil sector along with other areas of the economy. He also pledged to bring Libya into the World Trade Organisation (WTO), with adoption of a new customs system (Law‐Decree n°83 of July 7, 2005) including abolition of licenses, lowering of tariff protection by removing import taxes on all products (except 85 items), in favour of a 4 percent customs service (handling) fee, reducing customs duty on products manufactured locally to a maximum of 2.5 percent and consumer tax to rates of 25 or 50 percent (similar to VAT, which does not yet exist).

Custom procedures are being streamlined.

Other important reforms were made lately, in particular the planning of a more comprehensive medium term plan and the multiyear programming of the economic policy with the technical assistance of the IMF. Obstacles to private sector activity are gradually being lifted and a turning point in this process was the adoption of Law n.5/1426 in 1997 (encouraging foreign capitals investments), which allows investors to acquire a significant share of capital and have corporate control in many priority sectors: agriculture, services, industry, health and tourism. The Law was amended in June 2003; allowing co‐investments between Libyan and foreign partners, they also subtracted the projects of foreign investments to the main legal obligations regulating the activities of Libyan companies, in particular, to the registration procedure in the trade or industrial registers.

Furthermore, the decree n°178 allows commercial representation for foreign company, under some conditions. These reforms were followed by the establishment of the Libyan Foreign Investment Board (LFIB), created with the purpose of facilitating foreign

investment procedures and overseeing the application process as a one‐stop‐shop for foreign investors. Imports licences were abolished in 2003. In 2005, the authorities continued to reform and open up the economy. In particular, they streamlined the tariff schedule; partially liberalised interest rates; and passed laws to reinforce the central bank’s independence, allow foreign banks to operate in Libya, and fight money laundering. They also broadened the privatisation program and the scope for foreign investments to include downstream activities in the oil, health care, transportation, and insurance sectors; and launched the privatisation of a major public bank.

The privatisation program was initiated in January 2004, involving the sale of 360 economic units by 2008, but excludes the utilities, the oil and gas sector, and the air and maritime transportation sectors. Libya also is attempting to position itself as a key economic intermediary between Europe and Africa, becoming more involved in the Euro‐Mediterranean process and reciprocally, the European Union works for its accession to the Barcelona process and its participation in the European Neighbourhood Policy (ENP).

The Libyan economy remains largely state controlled but the pace of economic and structural reforms has picked up somewhat, with the implementation of measures aimed at enhancing the role of the private sector in the economy. Libya thus offers many business opportunities, as the country is heavily depending on imports.

Some State import monopolies were eliminated and State‐owned companies in charge of imports ‐like the “National Supply Company” which ensures the distribution of the products at very low prices, some being still subsidised at 90 percent‐, now face competition from the private sector, which can freely import or produce goods that were previously under public monopoly including the building and construction sector, iron and steel

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industry, mechanical industry and agricultural and food processing.

Libya is committed to reduce its dependency on oil, the countryʹs main source of income, and to increase investment in agriculture, tourism, fisheries, mining, and natural gas. Libyaʹs agricultural sector is a top governmental priority. Hopes are that the Great Man Made River (GMR) ‐ a five‐phase, US$ 30 billion project to bring water from underground aquifers beneath the Sahara to the Mediterranean coast‐, will reduce the countryʹs water shortage and its dependence on food imports.

International Trade Relations

Libya is a funding member of the Arab Monetary Fund (AMF), of the Council of Arab Economic Unity (CAEU), of the Islamic Development Bank (IDB), OPEC countries and AMU (Arab Maghreb Union). Libya is negotiating WTO membership since 2004.

Economic indicators

GDP by sector: Agriculture: 8.7 percent; Industry: 45.7 percent; Services: 45.6 percent.

Main industries: Oil, iron and steel, food processing, textiles, craft industry, cement.

Main exports: Petroleum, natural gas, chemical, and petrochemical products, fruits and nuts, and carpets.

Main imports: Machinery, transport facilities, semi‐finished commodities, and foodstuffs.

Major exports partners (2004): Italy; Germany; Spain; Turkey; France.

Major imports partners (2004): Italy; Germany; Tunisia; UK; Turkey; France.

Country risk

The main insurance and rating agencies recently improved their rating of Libya. The French COFACE for example allots the C score.

Key challenges

The Libyan economy still remains largely state controlled, heavily dependent on the oil revenues and is not diversified, the industrial sector being mainly based on the oil refining, petrochemical industry and the iron and steel industry. The unemployment rate is important, estimated at 25 percent particularly among young people. The economy has been weakened by years of ostracism. A plethoric administration paralyses the emergence of a dynamic private sector and the foreign investment is somewhat slowed down by the obligation to have a commercial agent in Libya and the difficulty in identifying a good partner. Moreover, there is a lack of reliable information and statistics to be used for market research.

The country needs foreign investments to increase its outputs of oil and gas to achieve economic diversification, too vulnerable to a reversal of the oil market. Although its rehabilitation within the international community and efforts to re‐integrate itself into the global economy gave more confidence to investors, structural reforms remain essential to achieve strong and sustained growth, to meet the demands of the rapidly growing labour force, and to develop a capacity‐building for sustainable human development and public sector reform.

The reform programme launched several years ago is promising but the achievements are not yet visible, apart from the abolition of imports taxes and the reduction of the subsidies on fuels and electricity. The country has a heavy workload. However, to realise its full economic potential, Libya is committed to build up a sound investment climate, with strong institutions to support open

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markets and improve the legal framework for investments and the protection of foreign investments.

Libya is an import‐driven country with extremely limited local production and manufacturing capabilities. Many of the country’s manufacturing facilities are in disrepair, overstaffed or under utilised. Recently, Libya announced plans to privatise several manufacturing plants, mostly in the areas of steel, iron, and cement. Other business and investment opportunities include textile and clothing industries and agricultural refining and processing.

Strong points

Libya has a strategic geographical location between Europe, Africa and Middle East and easy access to these markets.

Libya is a major oil and gas producer and can be considered the hot spot for new explorations. The favourable developments in the oil market lately will again generate consistent hydrocarbon revenues. However, the economic activity will remain strong in 2006, driven by private consumption and increased government spending. The substantial oil windfall will continue to generate comfortable budget and external current account surplus.

The Libyan authorities set the target to create a conducive environment for a more efficient economic activity, and the building‐up of a sound business climate, by adopting a market‐oriented policy, liberalizing the economy, and cutting some red tape to encourage private investment.

The foreign debt is moderate and the financial reserves comfortable. Libya has taken steps toward regularizing its relations with external creditors. A new debt department has been recently established at the Ministry of Finance, with a view to developing an external debt database and strengthening external debt management procedures.

The business environment is changing, the most important Libyan businessmen are now involved in the import/export business, wishing hopefully to connect the Libyan economy to the worldʹs trade and investment flows, and to the globalisation stream.

Lastly, the country has a very young population with an acceptable level of education. The literacy rate is the highest in North Africa; 82.6 percent of the population can read and write (CIA world fact book, 2006). Libya has a pool of skilled workers eager to emerge in the work force. Wages are substantially low.

Some progress was made on the reform front. Measures taken include the adoption of laws to encourage domestic and foreign private investment, the adoption of a new tax law, the removal of customs duty exemptions enjoyed by public enterprises, the reduction in tariff rates, and the adoption of a new banking law that gives the Central Bank of Libya greater independence in the conduct of monetary policy. In addition, a privatisation plan was initiated in January 2004, which involves the sale of 360 economic units.

Libya is rich in natural and mineral resources that can be considered the basis for many potential industrial, agricultural and tourism projects. The tourist potential, very little exploited up to now, is important (Mediterranean coast of Cyrenaica, archaeological sites‐ especially Leptis Magna).

How to invest in Libya? During several decades, Libya remained closed to foreign investments, its socialist and centralised economic system preventing virtually any external financing, except for oil partnerships and the long period of international embargo worsen this financial insulation. However, a major reformist course in the economy has been inaugurated by the appointment in June 2003 of the new Ministry of Economy, Mr. Choukri Ghanem (appointed

Invest in Libya

since April 2006 as the Chairman of the National Oil Company‐NOC), a promoter of a policy of economic openness with a main mandate “abolishing the public sector” and making Libya attractable to foreign capital. Over 54 large State‐owned companies will be opened to foreign investors. The companies to be sold to foreign investors are the largest among those to be privatised. The small and medium firms will be offered to Libyan investors.

The lifting of the international sanctions against Libya in 2003 allowed its return in the international fold. The hydrocarbon resources and the incentives to attract foreign investments are likely to improve the attractiveness of the country even if a long term process has to be taken to carry out the administrative reforms and improve the businesses climate. Moreover, imports are not any more a State monopoly. The sectors open to foreign investment are industry, health, tourism, services, agriculture, and any other sector approved by the National General People’s Committee (GPC).

Foreign investment is encouraged by Law n°5 amended by Law n°7 in 2003 and its decrees, in the fields of technology transfer, vocational training, regional development, industry, health, tourism, agriculture, oil related services but not drilling and exploration (these are covered by the Petroleum Law) and any other sector specified by the GPC. Tourism is ruled by the Law n°7 of March 6, 2004 and the Decree n°139 of August 26, 2004. Some sectors are still closed; the telecommunications and the financial sector, for example, remain government monopolies. Retail and wholesale operations are restricted to Libyan nationals.

In addition to many incentives, the law n°5 established the Libyan Foreign Investment Board (LFIB), in order to facilitate foreign investment procedures. LFIB oversees the application process and authorizes investment project by granting a 5 years licence, extended for 3 years. Moreover, the Law allows co investments between Libyan and foreign partners without limitation of the

foreign participation, except for those concluded with the banking sector and State‐owned companies, they also subtracted the projects of foreign investments to the main legal obligations regulating the activities of Libyan companies, in particular, to the registration procedure in the trade or industrial registers. Furthermore, the decree n°178 authorizes to carry on the activity of commercial representation for the account of a foreign company, under certain conditions.

The Foreign Investment Law provides many incentives for licensed projects such as a 5‐years exemption from corporate tax, with a possible extension of 3 years if net profits are reinvested in the project. It also provides an exemption from customs duties on imports of machinery, tools, and equipment needed for the project and for a period of 5 years as well as an exemption from excise taxes on exported goods.

Furthermore, foreign investors are allowed to repatriate the invested capital in case of total or partial sale; in case of conclusion or liquidation of the project; after 5 years from the date of release of the license; or within six months from the release of the license if independent difficulties or impediments emerge; to transfer profits; to employ foreign manpower when the local supply is not sufficient; and to purchase the land where the project is located.

The Free Trade Act of 1999 created a new legal framework for the establishment of offshore Free Trade Zones in Libya. Fields of investment and economical activities in Free Zones include:

Storage of transit and domestic goods, as well as goods produced within the Free Zones which are intended for export zones and goods imported for re‐export;

Unpacking, cleaning, re‐packing and similar operations within the Free Zone and guarantee their manufacture to meet the demand of the market;

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Performing industrial processes;

Rendering financial, banking, insurance, and other related service needed by the investors within the Free Zone.

Projects in the free zone enjoy standard privileges, including tax and customs exemptions, free repatriation of invested capital and gained profits; movement of capital and products between the Free Zone and foreign countries is not subject to any monetary restrictions or monitoring regulations; profits gained from activities also enjoy the same exemptions if reinvested; legal guarantees against the nationalisation of projects, etc. Misurata is currently Libya’s sole operating Free Trade Zone (FTZ). At present, the zone occupies 430 hectares, including a portion of the Port of Misurata.

Foreign investors wishing to set up in Libya have four main options: 1) set up a branch office; 2) establish a joint venture/joint stock company with a local firm; 3) establish a representative office; and, 4) enter Libya under the provisions of investment Law n°5.

Trade activities and joint ventures

The Law n°65 of May 20, 1970, governing trade and commercial companies, stipulates that any person or entity wishing to carry on a trade activity must have the Libyan nationality, however partnerships are possible. Joint ventures must be at least 51 percent Libyan‐owned.

Joint Venture holding companies are permitted under Libyan law. The establishment of Joint Ventures (Joint Stock Companies) is governed by Law n°65 of 1970, as amended by Law n°21 of 2000. The establishment of Branch Offices also covered by Law n°65, as well as the 1953 commercial code. In the construction/ contracting field, as well as other longer‐term activities, formation of a Joint venture or Branch Office is virtually a requirement for operating in Libya. The capital investment floor for qualification has been raised to US$ 50 million, and must be completely paid‐up during creation.

Representative office through a local agent

Law n°6 of 2004 mandated that foreigners wishing to sell direct to the Libyan market employ the services of a local agent. This law has since been softened; and since the decree n°8 of January 9, 2005, the following seven product groupings currently require a local agent: passenger vehicles, motorcycles, copying machines, ovens, refrigerators, washers & dryers, other major household appliances, televisions, faxes, and computers, road making and paving equipment, heavy agricultural equipment (including pumps). Libyan nationals no longer need import licenses to act as agents for foreign firms. The General Director of the office must be Libyan as well as the labour employed. Agencies are simply distributorship agreements, signed with a local firm or registered agent. The Tripoli International Fair, held each year in April, is an excellent window for marketing.

Opening of a branch office/local subsidiary of a foreign company

The decree n°3 of January 3, 2005 regulates the creation of a foreign subsidiary company in Libya. The request must be addressed to the Department of Company Registration within the Ministry of Economy and Trade, and include the name of the designated agent. The capital investment floor for qualification must be of 150.000 LYD and the duration of the activity is five years renewable. The scopes of activities authorised with the foreign subsidiary companies in Libya are determined by the decree n°13 of January 9, 2005. Opening a Representative Office does not grant a foreign company rights to sell or market goods in the country.

Entering Libya under the terms of Law n°5 for the encouragement of foreign investment

In this case, investments decisions are taken by the Libyan Foreign Investment Board who approves proposals and gives the licences. Many of the restrictions placed upon foreign companies in the

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above categories do not apply to foreign investments and there is no need to have majority Libyan ownership. The capital investment floor for qualification for entry under Law n°5 is US$ 50 million.

Contracting with State-owned companies

The law governing the contracts with the Libyan state companies requires foreign suppliers to pay a contract registration tax of 2 percent of the amount of the main contract or 1 percent for a sub‐contract.

It should be noted that sale contracts are settled exclusively by irrevocable letter of credit whose opening can take up to six months. Major construction contracts are often awarded on turnkey or EPC (engineering, procurement and construction/ commissioning) terms. BOT (Build‐Operate‐Transfer) contracts are extremely rare in oil & gas power sectors.

Taxation and customs formalities

Imports licences have been abolished since 2003. However, Libya requires standard import documentation including certificate of origin, tariff code, and Customs. The Libyan customs tariff is, since January 1998, aligned to the simplified harmonised nomenclature and as a prelude to its application to WTO membership, Libya is working to accredit its central Standards Bureau and to implement a network of certified national testing laboratories. The government significantly streamlined the customs tariff, and eased restrictions on external trade by downsizing the negative import list from 31 items to 17 items known as “of luxury” or locally manufactured. The Libyan Customs Administration cancelled duties on more than 3500 product categories, effective August 1, 2005. Approximately 80 products remain subject to duties of between 5 and 50 percent. The new tariff schedule has only two rates (10 percent for tobacco products and 0 percent for all other products); the import duties were replaced by a 4 percent service fee, which must be paid by

importers on all products except for 85 of them. Additionally, they have to pay a 2 percent tax for domestically produced goods and an excise duty of 25 or 50 percent. As mentioned above, duty rebates are available to foreign investors entering under the terms of Law n°5 (1997). In addition, the government created an investment fund to manage part of the government’s oil revenues.

Protection of foreign investments and dispute settlement

Libya ratified many International Conventions and concluded bilateral agreements of investments protection in particular with Tunisia, Morocco, Egypt, Austria, Germany, Malta, Switzerland, Belgium, Bulgaria, France, and Croatia. Article 23 of the Law n°5 on Foreign Investments stipulates that the investment project cannot be nationalised, dispossessed, submitted to custody or to sequestration or other similar provisions, without a judicial sentence and an equitable reimbursement. For dispute settlements, the Libyan legal system is rather effective and it is relatively easy to obtain an equitable judgement but the enforcement of judgments can be delayed. For international arbitration, Libya is not a signatory to the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention). In the case of commercial disputes, foreign entities currently opt to try cases before the ICC, the International Chamber of Commerce, whose judgments Libya has a history of respecting. Libya is a member of the Multilateral Agency of Guarantee of Investments (MIGA).

Libya is a member of the 1989 Arab Maghreb Union (AMU) linking Tunisia, Algeria, Morocco, Mauritania, and Libya. The AMU’s stated objectives include the encouragement of free movement of goods and people, revision and simplification of customs regulations, and movement towards a common currency. Nominally, AMU mandates duty‐free trade among its members.

Invest in Libya

Libya is a part of the Greater Arab Free Trade Area (GAFTA, also called PAFTA, Pan Arab Free Trade Agreement) and the Euro‐Med Partnership (EMP). In 1999, 27 European partners agreed to admit Libya, contingent on Libya’s accepting the Barcelona so‐called ʺacquisʺ. Libya has also applied for membership within the World Trade Organisation (WTO).

Income Tax Regime

The authorities passed a new tax law (n°11 of March 5, 2004), reforming the general income tax, reducing the top marginal tax rate on wages and salaries, and increasing personal tax exemptions bands. The corporate tax remains progressive, with a sliding scale from 15 to 40 percent, compared with 20 to 60 percent under the previous law.

An additional solidarity tax called “Jihad” is due which amounts to 4 percent on the taxable income. Foreign oil companies have a specific taxation regime, defined by “Petroleum Law” of 1955 in course of amendment. The income tax is composed of three tax brackets of 8, 10, or a flat 15 percent on income instead of 25 percent before. The general tax on incomes has been abolished. Contracts must be registered with the Tax department within 60 days of signing. Two percent of total amount or 1 percent of the subcontract is payable upon registration. The Income Tax Department considers that any payment related to the realisation of a contract in Libya is taxable and the total amount of the contract is taken into account for the calculation of the taxable income. In case of service or engineering contracts, the tax authorities charge 25 percent or more on the taxable profits.

Foreign exchange

Currency and Foreign Exchange controls: more flexible than before, it is managed by the foreign exchange control department attached to the Libyan Central Bank. Since June 16, 2003, Libya unified its

multi‐tiered exchange rate system (official, commercial, black‐market) effectively devaluing the countryʹs currency. Among other goals, the devaluation aimed to increase the competitiveness of Libyan firms and to help attract foreign investment into the country. Its value is approximately 1 Euro = 1.6 LYD. The Libyan Dinar not being a convertible currency, it is used only for current transactions in the country. However, foreign investor can open an account in foreign currencies in one of the commercial banks or in the Libyan Arab Foreign Bank (LAFB). Non‐residents working in Libya may open domestic accounts. Central Bank approval is required for all other credits to non‐resident accounts.

Foreign investors are allowed to repatriate the invested capital in case of total or partial sale, in case of conclusion or liquidation of the project, after 5 years from the licensing agreement or within six months from the investment act if independent difficulties emerge.

The Libyan Foreign Investment Board (LFIB) The L.F.I.B. is a one‐stop shop for foreign investors, established as a key component of the Investment Law n°5/1997 and provides many services intended to facilitate all procedures that are required for an entrepreneur to start up an industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required inscriptions and incorporation with relevant authorities. A major progress has been made in simplifying business application procedures in order to facilitate and accelerate business creation. In particular, a one‐stop window has been established. The foreign investment’s scope of activity has been broadened to include downstream activities in the oil, health, transportation, and insurance sectors. Also, joint ventures between Libyan and foreign investors are now permitted to benefit from the incentives of Law n°5 mainly an exemption from corporate income tax for up to eight years, and exemptions from customs duties and

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taxes on imports of equipment for the execution and operation of investment projects.

The main objectives of the LFIB are to:

Provide advice, information and support for investors.

Identify and promote investment opportunities, through the elaboration and the presentation of investment plans and economic studies for development of the country.

Receive and consider applications for foreign capital investments.

Issue licenses as well as obtaining approvals required for investment projects. Develop investment programmes and promotional activities to attract investors.

Recommend or renew exemptions, facilities, or incentives for the investment projects.

Look into complaints and protests of investors without affecting the investor’s right to petition and legal action.

One-Stop Shop Service

The establishment of the one‐stop shop service could be considered an important step for the simplification of procedures. It provides all services needed by foreign investors and this is being done by means of administrative offices within the L.F.I.B.’s premises. These offices include: Customs office; Immigration and passports office; Tax office and Labour force office.

Procedures and approvals that fall within the one‐stop shop services include:

License and permits’ procedures. Export and import procedures.

Foreign manpower procedures.

Ownership and renting of real estate procedures

Transfer of dividends procedures.

Complaint procedures.

http://www.investinlibya.com/en_index.htm (in Arabic and English).

A list of investment projects is available online at:

http://www.investinlibya.com/en_projects.htm

Financial & banking sector in Libya The banking structure includes the Central Bank of Libya (CBL), five State‐owned commercial banks, one private commercial bank (Bank of Commerce and Development), and 48 national banks. The largest of the state commercial banks, The Libyan Arab Foreign Bank (LAFB), operates subsidiaries and affiliates in more than 30 countries. Other State‐owned banks are Jamahiriya Bank, the National Commercial Bank, Sahara Bank (undergoing privatisation), Umma Bank and Wahda Bank.

A new banking law on Bank Reorganisation, Currency, and Credit (n°1 of January 12, 2005) has been passed which aims to modernise and introduce market‐based monetary instruments into the financial system, in order to make the banking structure to play a more proactive role in the redistribution of capital flows towards the most productive sectors of the economy.

The law gives the Central Bank of Libya (CBL) greater responsibility in the conduct of monetary policy, including issuing its own securities. In addition, the authorities have capped the interest rates across the board in an effort to encourage private sector demand for credit and developed a strategy to modernise the payment system. An Anti‐Money Laundering (AML) law has also been adopted (Law n°2 of 2005).

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Commercial banks must assume the form of a Libyan joint‐stock company with paid‐up capital of at least LYD10 million. According to the new law (art. 67), the Central Bank of Libya may permit the establishment of banks with foreign capital. It may also permit foreign banks to hold shares in domestic banks and to open branches or representation offices, and the capital allocated for the branchʹs activity in Libya must be of at least US$ 50 million.

The Central Bank of Libya (CBL) was created in 1956 in order to maintain the stability of the Libyan currency and to promote the sustained growth of the economy in accordance with the general economic policy of the State. With the new law of January 12, 2005, the functions of the CBL have grown and its supervision strengthened. It controls money supply and credit, supervises commercial banks to ensure the soundness of their financial position and protection of the rights of depositors and shareholders, and advises the State on the formulation and implementation of financial and economic policy. In addition, the CBL issued a number of decrees to improve the operations of commercial banks, launched the privatisation of Sahara Bank, and recapitalised three of the five State‐owned commercial banks. The governor of the Central Bank announced that privatisations of major banks will continue at the beginning of 2006, with Wahda Bank already scheduled. As of August 2005, banks were granted autonomy to determine freely interest rates on deposits and to set lending rates within a band of 250 basis points above the discount rate (currently at 4 percent).

As for the exchange control, the Libyan Dinar is used only for current operations in the country because it is not a convertible currency. However, foreign investors have the right to open an account in convertible foreign currencies in one of the trade banks or the Libyan Arab Foreign Bank. There are two offshore banks ‐Valetta Bank (Malta) and British Arab Commercial Bank (UK)‐. Bawag PSK (Austria), have opened a representative office in 2005

as well as HSBC. Other foreign banks such as the International Arab Bank (Egypt), Swiss Bank Channel, and Housing Bank of Amman have announced their intent to set up in the near future.

The government reduced to zero its debt with the trade banks and the Central Bank. The financial sector is underdeveloped and the payment system, completely embryonic, is in the course of modernisation. The credit card facilities will be introduced soon.

Telecommunication & Internet in Libya Telecommunications infrastructure developments are the main projects in which the government plans to invest massively in the next ten years. International companies in particular Alcatel, Siemens, Ericsson and Nokia are already operating in the country. Regarding Internet and data processing, many opportunities are offered to SME: for example, some US$ 15 million will be spent for the installation of a data‐processing network connecting Libyan banks. Demands on equipment and services relating to ICT are in growth for the public sector with the on‐going master plan for networking strategic public services, as well as the private sector, in particular for foreign oil companies, which need adequate infrastructures to carry out their projects.

The historical State‐owned General Post and Telecommunications Company (GPTC) oversees the Postal services, satellite telecommunications, mobile telephony (in partnership with Al Madar, Libyana Mobile Phone), fixed telephony and other associated services, as well as Libyan Internet service providers (ISPs) through the Libyan Telecom & Technology company (LTT). GPTC is also acting as a consultant for State‐owned companies and supervises big projects such as the Great Man River (GMMRA) and the municipalities (Shaâbiyates).

Libya has consequent network and transmission equipment comparing to its population: nearly 180 telephone exchanges (main

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suppliers: Alcatel, Siemens, Ericsson); 13 earth stations ensuring the national connections via the ARABSAT satellite (network DOMSAT); international connections and a VSAT network; nearly 10,000 km of radio‐relay systems and border to border connections, linking the Mediterranean coast from the Tunisian border to Egypt. It also provides more than 30,000 km of UHF radio bands; a 6,500 km network of coaxial cables, which doubles the radio relay system and connects 107 cities, which has been set up by four Italian companies (Pirelli, SIRTI, CEAT and Telettra). In 2005, the General People’s Committee (GPC) passed a law creating the General Authority for Information and Telecommunication (GAIT), which oversees GPTC and its subsidiaries/affiliate companies, as well as the National Authority for Information and Documentation (NAID).

Libya is confronted to many problems for the maintenance of its equipment. Digitisation began only lately and some equipment is on disrepair or out of service. In fixed telephony, the rate of penetration is less than 10 percent. Procurement for the supply of telephone exchanges for 1.5 million fixed lines (including 500,000 in broadband) and 7.000 km of optical fibre network was launched at the end of 2004.

There are two operators of mobile telephony: “Al Madar Telecom Co” and “Libyana Mobile Phone”. Libyana Mobile Phone (LMP), created in 2004 signed a contract with two Chinese companies: ZTE to provide 1.5 million lines and Huawei Technologies to provide 1 million lines. Alcatel and Ericsson obtained in September 2004 a US$ 100 million contract for the supply and the installation of a 3G mobile telephony network (one million lines for each), first network of this type in Africa.

The Thuraya Company, also subsidiary of GPTC with headquarters in Dubai, offers services of satellite telecommunication to mobile users. Libya must finalise its project of the Pan African

telecommunications satellite Rascom covering 44 countries, whose construction was given to Alcatel. A project of a monitoring satellite for the terrestrial environment is also being studied.

The only supplier of Internet access was LTT (Libyan Telecom Technology), subsidiary of GPTC, but three other providers. Libya is connected to the Internet through STM1 link (155Mbps) through the submarine fibre cable between Libya and Italy. The ADSL was introduced and 10.000 lines were installed. Tripoli enjoys Internet access but for the rest of the country it requires a long‐distance phone call. Web content development is still in its infancy but businesses are starting to embrace the new medium, particularly with the use of e‐mail. Apart from some cyber café, Internet access is still reserved for the high social class, because of its high cost.

In July 2004, GPTC issued tenders for the installation of a next‐generation backbone and switching networks with an eye towards bringing 3 million new lines into service by the end of 2005. GPTC is considering acquiring VSAT and VoIP capabilities in the near future. In September 2004, France’s Alcatel and Finland’s Nokia won a US$ 244 million contract to expand Libya’s nationwide mobile network by 2.5 million new mobile lines, using EvoliumTM mobile radio access and core network solution to serve GSM/EDGE and 3G users (Nokia’s part of the contract applies to the area from Tripoli to the Western mountains, while Alcatel’s covers Libya’s Eastern and Southern regions). GPTC has announced its intention to spend US$ 10 billion on telecommunications infrastructure over the next 15 years. In 2004, GPTC launched Libyana, a second State‐owned subsidiary. Libyana’s area of coverage will be limited initially to Tripoli, Benghazi, and Sebha. In December, 2005, Chinese firm Huawei won a US$ 40 million contract to increase Libyana’s capacity by 1 million mobile lines, and the Swedish Ericsson signed a US$ 58 million contract to provide al‐Madar with the same number.

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Business and Investment Opportunities in Libya Libya is a very promising market and new opportunities and challenges are opening up in the economy. With proven oil and natural gas reserves estimated at about 39 billion barrels and 1.5 trillion cubic meters, respectively and the price of oil at record levels, Libya’s oil and gas sector will remain a high priority for the near future. Libya, would like to see significant foreign investment in non‐hydrocarbon sectors. Important investment plans were launched to improve the infrastructure and transport networks, telecommunications (extension of the fixed and GSM network), information technology, electric power generation (to double the generation capacity from 4,500 MW to 8,000 MW by 2020), development of oil and gas exploration and production to reach an output of 3 Mb/d in 2010, project of the “artificial river”‐Great Man Made River‐, installation of 11 desalination sites, broadcasting (digitalisation of the equipment and training), development of food processing industry, development of a tourist industry, health & medical services, wastewater treatment, agricultural technologies, tourism, education & training, manufacturing, construction and engineering…

In 2005, 1 billion LYD was allocated specifically to alleviating Libya’s acute housing shortage, through state‐run building projects and mortgage loans. The Libyan government in recent years has increased the development budget, and raised the proportion of funds dedicated to telecommunications, construction, health, real estate and education.

The five‐year privatisation plan announced by the government considers the privatisation of 360 companies by 2008, of which 41 will be completely open to foreign capital. Priority has been given to heavy industries (steel and iron, chemistry, cement, vehicles assembly), textile, and shoes companies, farming factories and State‐owned public firms and banks. However, the bureaucratic

regulation and administrative procedures for foreign investments remain rather cumbersome (file application including an economic, marketing and social study, as well as an administrative file). However, foreign investors are allowed to buy land and buildings in Libya since the law of 21/10/03. A list of companies set for privatisation is available online at:

http://www.libyaninvestment.com/privatisation/privindex.php

The Libyan authorities set up the first elements of an FDI promotion strategy with the support of international financial institutions in particular the IMF. The law n°5 of 1997 for the promotion of foreign investments was amended in June 2005 in order to broaden the scope of FDI and widen the attractiveness of the country for foreign capital. In addition to the traditional incentives (custom and tax exemptions), the Libyan Foreign Investment Board, acting as a one‐stop‐shop for foreign investors was created. It grants a 5 years licence, extended for 3 years. It also allows partnerships between Libyans and foreigners without limitation of the foreign participation except for those concluded with State‐owned enterprises and the banking environment. The incentives offered by the law are: customs duties exemption, income tax exemption, and the repatriation of all benefit.

The oil sector is ruled by a more attractive legal framework (law n°25 of 1955 called “Petroleum Law”).

Agriculture, fishery and food processing

Agricultural development is a national priority. Largely covered by the desert, the climatic conditions and poor soils severely limit agricultural output, and only 1 percent of the land is arable while approximately 8 percent is in pasture and the rest is agriculturally useless desert. Most arable land lies in two places: the Jabal al Akhdar region around Benghazi, and the Jeffarah Plain near Tripoli. Agriculture occupies 18 percent of the workforce and

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accounts for 6.7 percent of GDP. Libya’s main crops include wheat & barley, tomatoes, citrus fruits, potatoes, olives, figs, apricots and dates. Until recently, farming activity depended wholly upon erratic rainfall and poorly developed irrigation systems. To ease the chronic water shortage, a massive engineering project known as the Great Man‐Made River was launched in 1983, which consists of more than 1300 wells, and supplies 6,500,000 m³ of freshwater per day to the cities of Tripoli, Benghazi, Sirte, and elsewhere and 40 percent of this water is dedicated to agriculture. Libya aims at increasing its cultivable surfaces of 200,000 ha to 600,000 ha by 2008 to ensure the needs for its population.

Concerning the food processing industry, the years of embargo caused the closing of the majority of the transformation units and those that are still in activity have obsolete or useless equipment and work under‐utilised. The majority of the foodstuffs are imported essentially of Tunisia, Egypt, and Malta.

In an effort to increase agricultural production and to stem rapid migration to the major coastal cities, the Libyan government has offered various subsidy and land grant schemes. To date, the most successful ventures have been those that consolidate smallholdings into large production and marketing operations. With the aid of imported technology (irrigation, etc.), foreign consultants have helped identify “off‐season” export crops (red globe grapes, other), fed by water from the Great Man‐Made River.

A major agreement for the development and the modernisation of the Libyan agricultural sector was signed with the Food and Agriculture Organisation (FAO) in 2003. It aims to the improvement of national food safety thanks to promotion and to the diffusion of the production of seeds and plant breeding on a broad scale.

Agricultural mechanisation is underdeveloped. Procurements are set to be launched by Libyan Tractorʹs Co, the sole company

manufacturing farming equipments; by GENCO, the public importer of farm equipment; and from public departments, the Ministry for Agriculture, the Directorate‐General for the Agricultural Projects, etc. The needs include traditional farming equipment but also power generating units and irrigation pumps for the needs of small farms sometimes badly fed in electricity and water.

Of livestock, sheep is dominating, counting about 5.6 million. Because of the climatic conditions, which prevail in the country, the grazing land is rare in Libya for animal feeds and the country’s needs for meat are imported from Romania, Egypt, and Australia. It also imports frozen meat from Australia and New Zealand. Poultry farming has been encouraged in the country for subsistence food. However, Libya imports frozen poultry meat in small quantities. Eggs for laying can be imported, but imports eggs for direct consumption are prohibited. Some large farming factories are planned for privatisation. Tenders should be launched during 2006 for the purchase of livestock (mainly dairy cattle). Other opportunities exist in particular in the husbandry expertise and race improvement in order to optimise the dairy breeding and the breeding for meat. Tenders are also planned to purchase veterinary products and small specific equipment.

With a coastal line of 1,800 km and the second largest continental shelf in the Mediterranean, surveys have indicated ample quantities of white fish, tuna and unexploited sea sponge and coral reserves, but this potential has not been exploited until now because of a small and old fishing fleet. The government has been encouraging fishing activities and attempting to stimulate the consumption of fish products. The catch includes tuna, sardines, and red mullet. In 1986, a new fishing port was built at Zuwarah (northwest), and numerous ice plants have been built at several coastal sites. Agreements for joint development of fishing have been signed with several countries, including Tunisia and Spain.

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There is currently a factory of tuna processing in Zanzur and two others in Zuwarah and Khoms for sardines canning. Many opportunities are offered in fisheries, fisheries industry, trawling and in aquaculture, the local marine environment being naturally suitable for aquaculture investment projects. The government and private companies wish to create cannery and tinning facilities or to sell those already existing. The preservation process, freezing technologies and plants, food storage equipment and refrigerated rail cars are also needed.

Water supply

Libya is a desert country, and finding fresh water has always been a problem. The natural resources (surface water, groundwater, watershed) cover only 2.3 percent of the needs evaluated at 5 Gm3 per annum (including 80 percent for agriculture), the major part being satisfied by groundwater. A national management strategy of the various hydraulic sources was worked out by the General Council of Planning.

Likewise, progress was made in terms of access to safe water for the population, for productive purposes in Agriculture and for Industry, addressed through the construction of the Great Man‐Made River.

The key national priority is to finalise the Great Man‐Made River project. Phase I of the GMMR completed in 1991 at a cost of US$ 14 billion pumps approximately 2 million cubic meters of water a day from As Sarir and Tazerbo to Benghazi and Sirte, over a distance of 1200 km. Phase II is complete and delivers 1 million cubic meters of water a day from the Fezzan region to Tripoli and the Jeffarah plain. Phase III is divided into two sets of projects. Those centred in the East include a 700km expansion of the existing Phase I system linking Sarir to Benghazi, adding 1.68 million m3/day to Phase 1 capacity. The expansion includes the construction of a reservoir and pipeline linking Tobruq to a well‐field at Al‐Jaghboub. The

500‐kilometre pipeline will pump 138,000 cubic meters per day. The ‘Western’ project consists of building a pipeline linking Ghadames to Zuwarah and Zawiya. Subsequent phases involve the extension of the distribution network together with the construction of a pipeline linking the Ajdabiya reservoir to Tobruq. Ultimately, the Eastern and Western pipelines will be linked into a single network.

The GMMR project is managed by the Great Man‐Made River Authority (GMMRA). The prime contractor for the initial phases was South Korean construction Dong Ah. The preliminary engineering and design work for Phase III, a US$ 15.5 million contract, went to Nippon Koei/Halcrow consortium. The Frankenthal KSB consortium won a contract for construction of pumping stations and technical support, while Canada’s SNC‐Lavalin built the pipe production plant (Lavalin recently signed an MOU for an additional US$ 1 billion contract to assist with water distribution). The cost of this strategic project is evaluated at approximately 31 billion dollars, project with which is associated the French group Vinci.

On the other hand, current desalination output is reportedly 30 million cubic meters per year. It is widely believed that, even with extensions to the GMMR, there will be a large demand for desalination technology in Libya over the coming years. Over 60 percent of medium and large capacity desalination plants currently operating are more than 17 years old. A desalination of saline water project to supply the towns of Zuwarah (east) and Aboutara (western) was awarded to Sidem, subsidiary of Veolia Environnement. Other projects of water mobilisation are managed by the municipalities; in charge of the construction and the maintenance of watersheds and reservoirs. Some 23 new reservoirs must be built in addition to the 17 already built, increasing the storage capacity from 60 mm3 to 120 mm3 of water. Foreign companies are already active in this sector like the French

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engineering and design department Coyne and Bellier, which makes a study for a watershed in Wadi Kattata with the Italian company Del Navero and the Yugoslav company Hydrograznia carries out the dams of Zaghadua and Shuhubeen.

The Libyan government seeks to increase its output desalinated and recycled water by the establishment of new water purification units. A desalination complex of a capacity of 250,000 m3 per day in Janzour in the Western suburbs of Tripoli, has been launched, the investment for this project is estimated at US$ 650 million. In Khoms, German DVT is building desalination units, and Sidem is building some in the West of Tripoli (e.g. Tobruq). Ionics (US) is also an important actor in this sector. The Public company GECOL is increasingly involved in this sector, and can become in the long term a major project superintendent for relevant projects. The General Company for Water and Wastewater (GCWW) seeks to tie partnerships for the maintenance of its stations of purification and it signed an agreement with the English company Invent. Lastly, Biwater Construction (GB) has been awarded three contracts of 40 million Euros for the installation and the maintenance of 13 stations of desalination in Libya. Libya envisages doubling, by 2025, its processing capacities of worn water and seawater, which covers respectively only 1.4 percent and 0.7 percent of the needs. Other issues such as the Environment, which

have been given less priority in the past, are nowadays attracting the government’s attention especially in terms of sanitation and management of solid wastes in less affluent urban areas, as well as the pollution of the country’s coastline.

There are thus many opportunities in the civil engineering and in public works. Several hundred million of dollars worth of water, wastewater treatment, and desalination contracts are expected to be awarded over the coming few years.

Building Construction

The Libyan authorities launched a real property programme in order to reach 150,000 houses and flats over 3 years and entrusted the General Authority of Infrastructure and Constructive Development (GAICD) the execution of the engineering studies and public works (accommodation, roads, and networks). The first project relates to the construction of 50,000 houses in Tripoli with Chinese and Malaysian companies which will be able to call upon foreign companies for the realisation of this important project, integrating commercial, restoration and leisure’s infrastructures. Amona Ranhill Consortium, owned at 60 percent by Ranhill Bhd (Malaysia) obtained a contract of construction of 20,000 residences in the municipality of Tajura, close to Tripoli. In addition, 50.000 individual or collective residences will be built by Libyan engineering companies. For this purpose, the Libyan banks will offer loans over 30 years at an attractive 2 percent interest rate. Lastly, 50,000 other residences will be financed by various private investment funds. Industrial construction is also booming. Contracting services and construction materials will be required in the coming years to support major road, large‐scale office complex, hotel, and residential housing projects.

Civil Engineering, transportation and infrastructure

Libya’s transport infrastructure is extremely weak. Roads, highways, railroads, ports, airports, all the infrastructure network must be upgraded. The paved road network (83,200 km) is insufficient taking into account the needs of the country development. The paved roads account for the 2/3 of the national network and the quarter of the current road network is in bad condition. The main road is the 1,822‐km national coastal highway between the borders of Tunisia and Egypt passing by Tripoli and Benghazi. The “General National Company for Roads” supervises the maintenance and building work. Contracting authorities have

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been set up in each of the shaabiyyat to oversee road construction. The government has issued a number of high‐profile road and road‐improvement tenders in recent months.

Inactive since 1969, the railways network was re‐opened and a national company, the Railways Executive Board, was created in 2000. It signed a US$ 477 million contract with the Chinese “China Civil Engineering Construction Corporation” and began the first phase of construction of a 163 km line with 16 stations from the Tunisian border, to Tripoli.

Libya currently has 132 usable airports, of which 57 have permanent surface runways. There are four international airports: Tripoli International Airport; Benina Airport (near Benghazi); Sebha Airport, and Misratah Airport. There are also 10 regional airports as well as smaller airfields. Because of U.N. sanctions against Libya, air travel was proscribed between 1992 and 1999, the aviation infrastructure deteriorated and the serviceability of many Libyan aircraft declined. An US$ 800 million programme to improve the airport infrastructure and air traffic control network was approved in mid‐2001. More than 20 airline companies resumed flights to Libya. In addition, along with the Libyan Arab Airline and Afriqiyah Airlines, a third company, Buraq Air transport, was set up and ordered six Boeings 737.

Lastly, Finmeccanica, AgustaWestland and the Libyan Company for Aviation Industry have signed an agreement to form a joint venture called the Libyan Italian Advanced Technology Company (L.I.A.TE.C.) in order to provide know‐how, training, technology and equipment, while the Libyan shareholder will mainly invest in infrastructure, plant and local marketing activities. A training centre open to all Libyan flight and maintenance personnel will also be set up. At the same time as announcing the creation of the joint venture, AgustaWestland announced a contract to supply ten A109 Power helicopters for border patrol, as part of a programme

that is worth a total EUR 80 million, including equipment and services. The deliveries of the first two helicopters are expected at the end of 2006 and the beginning of 2007.

Concerning the maritime sector, the ports and harbours infrastructures are composed of several ports and oil storage terminals. Work started in the port of Tripoli to increase its capacity but the harbour capacities remain under utilised. There are several development prospects in this area particularly for the maintenance of the existing infrastructure, modernisation and the adaptation of the maritime embankments to all means of transport by containers and tankers and the creation of a new terminal for oil storage. The Libyan government announced it would be spending US$ 10 billion to buy 32 new ships and it would spend US$ 600 million on port improvements.

Hydrocarbons

Libya has huge reserves of hydrocarbons. According to the Oil and Gas Journal, the country has total proven oil reserves of 39.1 at the end of 2005, 3 percent of the world reserves, and 40 percent of the African continent. The volume discovered in the country already reached 140 billion barrels. Gas production will reach 10 billion m3 in 2006 including 8 billion exported towards Italy via the Green stream. Libya ranked 21st in 2003 and the 3rd rank on the African continent behind Algeria and Nigeria. However, these figures underestimate the real reserves of the country. Libya would conceal much more hydrocarbons, because only one third of the territory is currently covered by prospecting and production agreements, in spite of the recent procurements and is considered as a highly attractive oil province.

During 2004, Libyan oil production was estimated at nearly 1.6 million barrels per day (bbl/d), with consumption of 237,000 bbl/d and net exports of about 1.34 million bbl/d. For the 2000‐05 periods, the sector of hydrocarbons contributed for 56 percent to the GDP,

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97 percent of exports of the country, and 80 percent of the revenues. The vast majority of Libyaʹs exports are sold to European countries like Italy (562,000 bbl/d in January‐October 2005), Germany (285,000 bbl/d), France (101,000 bbl/d), Spain, and Greece. In addition, Libyan oil exports to the United States averaged 56,000 bbl/d during the first 10 months of 2005, after resuming in June 2004 for the first time in two decades.

However, Libya remains ʺhighly unexploredʺ and only around 25 percent of Libyaʹs area is covered by exploration and production agreements. The under‐exploration of Libya is due largely to sanctions, to the lack of modern technology, and also to stringent fiscal terms imposed by Libya on foreign oil companies. Changes to Libyaʹs 1955 hydrocarbons legislation, is likely to prove extremely helpful in boosting the countryʹs oil output.

Since the lifting of the U.N. and US. sanctions, the government decided to modernise the infrastructures of the country and to increase the oil production. Overall, Libya would like foreign company help to increase the countryʹs oil production capacity from 1.60 million bbl/d at present to 2 million bbl/d by 2008‐2010, and to 3 million bbl/d by 2015. Libya is seeking as much as US$ 35 billion in foreign investment over that period to achieve this goal, and to upgrade its oil infrastructure in general.

In this scope, the country held two bidding rounds called EPSA IV (Exploration & Production Sharing Agreement IV) in 2005. EPSA IV round ‐launched in August 2004‐offered 15 exploration areas for auction. In October 2005, Libya held a second bidding round under EPSA IV, with 51 companies taking part and nearly US$ 500 million worth of new investment flowing into the country as a result. In this round, acreage in 26 fields, both onshore and offshore, went to 19 companies. Agreements were for exploration periods of 5 years, extendable to 25 years under certain conditions. With the success of the first and second bidding rounds, NOC announced in 2005 that

the country will offer at least four more bid rounds in 2006 and 2007, covering 261 blocks.

Libyaʹs oil industry is controlled by the State‐owned National Oil Corporation (NOC), which in turn runs subsidiaries Waha Oil Company, Arabian Gulf Oil Company (Agoco), Zueitina Oil Company (ZOC), and Sirte Oil Company (SOC). Libya has five refineries (Ras Lanuf export refinery, Az Zawiya refinery, Tobruq refinery, Brega, and Sarir) with a combined nameplate capacity of approximately 380,000 bbl/d, significantly higher than the volume of domestic oil consumption (258,000 bbl/d in 2005). Libya is seeking a comprehensive upgrade to its entire refining system, with a particular aim of increasing output of gasoline and other light products (i.e. jet fuel). Possible projects include a new 20,000‐bbl/d hydro skimming refinery in Sebha, which would process crude from the nearby Murzuq field and meet local demand in south‐western Libya; and a 200,000‐bbl/d export refinery in Misurata. The Syrte Oil Company launched a call for tender for the construction of two gas pipelines for a value of US$ 270 million and Zawiya Refining Company launched a call for tender at the end of 2005 for the extension of the terminal and refinery facility of Az Zawiya. The Libyan government recently sold 60% of its interest in Tamoil. This company is present in Egypt, in Switzerland, in Germany, in Italy and in Niger.

Libya has vast natural gas reserves. Proven reserves as of January 1, 2006 were estimated at 53 Tcf by the Oil and Gas Journal, but the countryʹs reserves are largely unexploited and unexplored, and thought by Libyan experts to be considerably larger, possibly 70‐100 Tcf. In recent years, large new discoveries have been made in the Ghadames and El Bouri fields, as well as in the Sirte basin. Libyan natural gas development projects currently on‐going include as‐Sarah and Nahoora, Faregh, Wafa, offshore block NC‐41, Abu‐Attifel, Intisar, and block NC‐98.

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To expand its gas production, marketing, and distribution, Libya is looking to foreign participation and investment to increase its gas exports, particularly to Europe (mainly Italy and France), and to convert the power stations which still function with the heavy crude or the diesel. The underlying objective of this programme is to triple exports. Libyan gas exports to Europe are increasing rapidly, with the Western Libyan Gas Project (WLGP) the ʺGreenstreamʺ underwater gas pipeline. The WLGP ‐a 50/50 joint venture between Eni and NOC‐ has now expanded these exports to Italy and beyond. Currently, about 8 billion cubic meters (210 Bcf) per year of natural gas are being exported from a processing facility at Melitah, on the Libyan coast, via Green stream to south‐eastern Sicily. After that, the gas flows to the Italian mainland, and then onwards to the rest of Europe. In 2001, a joint venture agreement was signed between NOC and Egyptʹs EGPC for the construction of a pipeline between Egypt and Libya. The joint venture company is called ʺArab Company for Oil and Gas Pipelines,ʺ or ACOG.

Yet, another ambitious project is to build: a nearly 900‐mile pipeline from North Africa to Southern Europe. It would transport natural gas from Egypt, Libya, Tunisia and Algeria, via Morocco and into Spain (a pipeline between Morocco and Spain already exists). In addition, Tunisia and Libya agreed in May 1997 to set up a joint venture, which will build a natural gas pipeline from the Mellita area in Libya to the southern Tunisian city and industrial zone of Gabes. In late 1998, Tunisia and Libya signed an agreement for around 70 Bcf of gas per year to be delivered from Libyan gas fields to Cap Bon, Tunisia, and in October 2003 the two countries set up a joint venture gas company to build the pipeline.

Foreign companies are looking to Libyaʹs liquefied gas LNG potential. In May 2005, Shell agreed to a final deal with NOC to develop Libyan oil and gas resources, including LNG export facilities. Reportedly, Shell is aiming to upgrade and expand Marsa El Brega and possibly build a new LNG export facility as well at a

cost of US$ 105‐US$ 450 million. Shell also purchased exploration rights for five blocks in the Sirte basin (the company began seismic work in November 2005). In addition to Shell, other companies like Repsol are also interested in developing Libyaʹs LNG export potential.

The Energy Ministry was re‐established in 2004. Oil rights in Libya are awarded under Exploration and Production Sharing Agreements (EPSA) based on the 1955 Hydrocarbon Law. Downstream investment is covered by the 1997 Foreign Investment Law.

Electricity and power generation

According the official data, the wiring rate of the country reaches nearly 100 percent. Libyaʹs power demand (4 GW in 2005) has grown rapidly over the past few decades in line with the country development, and major expansions of the country’s generation, transmission, and distribution systems are planned for the next five years with plans calling for a doubling in power generating capacity by 2020 to reach 8 GW.

According to the General Electricity Company, Libya currently has electric power production capacity of about 4.9 gigawatts (GW). Most of Libyaʹs existing power stations are being converted from oil to natural gas, and new power plants are built to run on natural gas, in large part to maximise the volume of oil available for export purposes. Libya is also looking at potential wind and solar projects, particularly in remote regions where it is impractical to extend the power grid. To respond to the growing need, Libyaʹs State‐owned General Electricity Company (GECOL) has drawn up a long‐term master plan worth US$ 3.5 billion of investment in eight new‐combined cycle and steam cycle power plants by 2010. Further US$ 2.6 billion will need to be invested by 2020. About 2,400 MW of this extra capacity is under construction, and the rest is in different stages of contracting. Deals have been signed with Russia’s

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Tekhnopromexport and South Korea’s Hyundai, worth US$ 600 million and US$ 280 million respectively. Several power plants are being built, including: the Western Mountain Gas Turbine Power Plant; the Zawiya Power Plant Gas Turbine Extension; the North Benghazi Combined Cycle Power Plant; the Zawiya Combined Cycle Power Plant; and the West Tripoli Power Plant Extension.

GECOL’s development plan also includes the building of hundreds of new substations networks, the restoration of 1.000 km of lines, the construction of 20.000 km of overhead lines, of 7.500 km underground cables and 3.000 sub‐stations to upgrade the transmission and distribution systems. A new 400 kV grid and an expansion of the existing 220 kV system are expected to cost around US$ 1 billion. Lastly, nearly US$ 200 million should be invested to set up 10 network control centres by 2015. In 2004, a US$ 225 million deal was signed with Germany’s Siemens to provide five district network control centres, scheduled for commissioning in early 2008. Ten control centres are planned by 2010. A new national control centre is expected to come into operation in 2006, in addition to the upgraded Tripoli control centre.

Libya is also acting to reinforce interconnection with the Tunisian and Egyptian power grids: the 220 Kv networks between Egypt and Libya are connected since 1998, those between Tunisia and Libya since 2004. Lastly, a Maghreb consortium called Eltam was created between Libyan entity GECOL, the Egyptian EEHC, the Tunisian STEG, Algerian Sonelgas and Moroccan ONE to study the feasibility of a highway backbone of the transmission network to enhance the interconnexion in the whole Mediterranean (MEDRING, Euro‐Mediterranean electric ring). The projected growth of oil production will generate an additional demand for electric power. The National Oil Corporation and its subsidiary companies have 117 electricity generators of a total capacity of

1.100 MW. These materials require work of maintenance and the NOC has requirements in new equipment.

Libya also intends to develop renewable energies with a capacity 510 MW by 2020. GECOL is mapping an atlas of the wind and solar power potentialities and already finished the study for the wind potential of the East coast of Libya. The realisation of a pilot farm of wind‐powered generator of 25 MW is planned as well as another pilot scheme using photovoltaic technology to provide electric power is being studied.

Healthcare and medical supplies and services

The pharmaceutical market is booming because there is no local production as testifies the expanding growth of imports in this sector. The total value of imports of drugs and medical equipment is estimated at 280 million Euros per annum, with 70 percent for pharmaceutical products and 30 percent for medical equipment. Growth prospects are expected to be considerable owing to a strong population growth (+3.6 percent per annum), a consequent government aid provided to the CEN‐SAD countries (Community of the States of the Sahel and the Sahara); and the planned investments in the healthcare systems.

Libyan suppliers are mainly European: English, Italian, Swiss, German, and French. The government is the main purchaser through various organisations, and the Red Crescent Association, increasingly active in the country. Imports in this sector were a State monopoly, but since the opening and the privatisation of the market, new import licences are granted to some operators for the supply of pharmacies and private clinics. The public sector is being reorganised and could cover approximately 60 percent of the market. Companies wishing to take part to public procurements or to distribute products in the market through a local agent must be recorded at the “Food and Drug Control Centre”. Tenders generally take place in spring for the public supply or throughout

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the year for the Red Crescent, but it is advised to be regularly informed by the local representative. In‐market production of drugs and partnerships with Libyan operators offers a means to gaining a foothold and is rewarding investment opportunities.

Libya’s hospitals and clinics largely do not meet international standards. Those Libyans with sufficient resources travel to Tunisia, Jordan, or Europe for medical care. Benghazi Medical Centre recently announced a US$ 120 million tender for mid‐term management and complete furnishing of the facility, including advanced imaging equipment, basic supplies, furnishings, etc.

Tourism

The country has a huge potential. In addition to the 1,800 km of coasts and virgin beaches, Libya has a lot of natural resources such as the Sahara desert with its gigantic dunes, regs and oasis. For the cultural heritage, Libya is home to some of the worldʹs best preserved archaeological sites, showcasing tales of Roman, Byzantine, and Greek civilisations as in Sabratha, Lebda (Leptis‐Magna, among five world heritage sites in Libya) Sahat (Cyrene), Sousa (Appolonia), Dirsiya/Tolmeita (Ptolemasis).

The country is covered by a good road network and many airports. According to the High Authority for Tourism and Antiquities (HATA) forecasts, the number of tourists should rise from 290,000 in 2004 to 630,000 in 2006 and 1,025,000 in 2008. However, the hospitality capacity is very limited. The number of hotels is 194 per 11,815 rooms and a 19,969 beds capacity. The majority is located in the urban areas of Tripoli and Benghazi but few attain acceptable international standards.

The government wishes to build 14,800 additional rooms by 2008. A Ministry in charge of Tourism was set up with a US$ 7 billion of funds to be invested over five years including investments in new accommodation; significant improvement both in the development

and presentation of tourist attractions, including those targeted at the domestic tourism market, and the provision of ancillary supporting tourist facilities and services.

The tourist activity is governed by the Law n°7 May 2004 and its decrees of application. Law n°7 of 2004 created the Libyan Association for Voyages and Tourism (LAVT), responsible for the development of a comprehensive, nation‐wide tourism policy. LAVT is the coordinating body for 25 government‐run tourism agencies. Tourism projects may profit from the incentives granted by the Law n°5 of 1997, which has been revamped in 2003 (tax advantages, exemption of customs duties on the import of equipment necessary to the realisation of the projects, etc.).

Several projects already started in particular the tourist complex of Tajoura (suburbs Are of Tripoli) and “Borj Al‐Ghazala” in Tripoli and others are in the pipeline. The project of safeguard, restoration and management of the historical district of the Medina of Tripoli has been transformed into a tourist centre. The opening to private investment allowed the arrival of foreign investors like the Hotel “Corinthia Bab Africa”, built in partnership with Maltese. European firms, including France’s Club Med are rumoured to have opened talks with the government for the construction of a few large resort facilities. South Korea’s Daewoo reportedly has plans to build a 100 million dollar, 3000‐bed hotel complex in Tripoli. In 2004, the Italian real estate broker Gruppo Norman signed a deal with the Libyan government, a first step towards the construction of a 300 million Euros resort on the island of Farwa, near the Tunisian border. A number of Italian firms have come to similar understandings regarding proposed developments in the Homs/Leptis Magna area such as “Valtur”. The other tourism services such as travel agencies, cars rentals and tours guide are also booming all over the country.

Morocco

Overview

References

Capital Rabat Surface area 710,000 km2 (incl. Western Sahara) Population 30,666,000 inhabitants (2006) Official Language Languages used

Arabic Berber, French, Spanish

GNP (dollars) US$ 65.93 (Ministry of Finance, 2006) GNP/per capita (dollars)

US$ 2,152 (Ministry of Finance, 2006)

Religion Islam (98.7 % Muslims); Christian (1.1%) and Jewish (0.2%) minorities

National days 30th July (Fête du Trône), 18th November (Independence Day)

Currency (March 2007)

Moroccan Dirham (MAD) 1 Euro = 11.23 MAD ‐ 1US$ = 8.4 MAD

Signed on 26/02/1996; implemented since 1st March 2000 EU web site: http://www.delmar.cec.eu.int

WTO membership Member since 1/1/1995

Economic profile

A Mediterranean country that also borders the Atlantic, the Kingdom of Morocco is the most western country in North Africa, with a western coastline along the Atlantic Ocean that turns at the Straits of Gibraltar and continues along the Mediterranean Sea. Its eastern border is with Algeria and a relatively narrow body of water separates it from Spain to the north.

Over the past decade, Morocco has embarked on an ambitious programme of structural reforms in several fields (cf. good performances attested by the report Doing Business), aiming to further liberalise its markets and enhance the competitiveness of its economy.

This policy aims to help the Moroccan economy reach more sustainable growth, improve living conditions, and reduce social and regional disparities. Morocco has achieved significant progress as regards democratisation of public life, education and health, and strengthening of basic infrastructure. All these advances have contributed to greater social and political stability. However, growth in Morocco’s economy remains volatile, heavily dependent on agriculture, which in turn is at the mercy of weather conditions.

Morocco enjoyed higher economic growth of 4.5 percent between 2001 and 2004, but this is far from the level needed to fight poverty. The growth rate slipped to 1.7 percent in 2005 (compared to 3 percent in budget projections), affected by severe drought conditions (reflecting the economy’s great vulnerability to weather conditions), the slow transition of using national savings for productive investments (including those generated by transfer of funds from abroad) and Moroccan companies’ relatively weak competitiveness in the world economy despite the small/medium business modernisation programme. However, recovery came quickly in 2006 (official estimates say above 8%), partly explained by exceptionally high agricultural output.

Inflation went slightly up in 2006, around 3.3% (2.6% in 2005) and external balances are at a comfortable level, with foreign debt estimated at US$ 15.4 billion (25.2 percent of GDP) and the budget deficit (6.3 percent of GDP) remaining moderate but very much dependent on proceeds from privatisation, remittances, tourist receipts and foreign direct investment. Gross domestic debt was on the rise in 2005, amounting to 71 percent of GDP compared to 66.4

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percent in 2004 and 66.9 percent in 2003. The 2005 budget included significant exceptional expenditures, in particular those related to the implementation of the operation of voluntary retirements which cost the State DH 8.5 billion. Concerning the year 2006, the achievements regarding the principal economic and financial indicators are rather encouraging:

The investment rate was around 29.4 percent of the GDP and the saving rate reached nearly 33 percent;

The current account of the balance of payments shows a surplus for the sixth consecutive year being at nearly 4 percent of the GDP. The exchange reserves, including the banks assets, reached 190 billion DH, that is to say 24 billion DH more than at the end of 2005;

Morocco’s largest employer is the primary sector, with 45 percent of the labour force and 60 percent of the female labour force. Agriculture represents between 12 and 17 percent of GDP, with variations from year to year, particularly vulnerable when rainfall is low. The secondary sector accounts for 30 percent of GDP, dominated by extraction and transformation of phosphates, which represent more than 17 percent of world production. The services sector is the largest sector in terms of contribution to real GDP (around 38 percent). Manufacturing is dominated by chemical and related industries, food, textiles, clothing, and leather goods, with an 18 percent share of GDP.

Long‐term trends for Moroccan trade indicate increasingly open foreign trade, up from 49.5 percent in 1977 to 60.5 percent in 2005, thanks to the coming into force of the free trade agreements with the EU, the USA and different Mediterranean countries. In 2004, imports reached US$ 17.822 billion and exports US$ 9.925 billion. Exports from Morocco are dominated by three groups of products, representing nearly 79 percent of total sales: consumer goods (more than 80 percent being textile products), semi‐finished products

(phosphoric acid, natural and chemical manure, beverages) and foodstuffs. Sale of gross products (11.6 percent of total exports) involves primarily phosphates. Nearly 85 percent of the country’s imports involve semi‐finished products, consumer goods, equipment, and energy‐generating products. The EU is Morocco’s primary trading partner, providing 65 percent of Morocco’s imports (EUR 9.6 billion) and receiving 70 percent of Morocco’s exports (EUR 6 billion). France is by far the Kingdom’s number one trading partner (23.5 percent of overall trade), followed by Spain (12.9 percent), Italy (5.7 percent), Germany (4.1 percent), the United Kingdom (3.7 percent) and the United States (4.1 percent).

Morocco has signed a free trade agreement with the European Union, which came into effect on 1 March 2000. This agreement will gradually establish free trade of industrial products, for which the European Union already grants free access, while Morocco is committed to gradual tariff dismantling over a 10‐year period starting March 2003. With regard to agricultural products, new reciprocal trade concessions came into effect in January 2004. A “rendezvous” clause is set for 2007, in the framework of dismantling of obstacles to trade in these products.

In addition to tariff dismantling and the lifting of restrictions on exchanges of goods, Morocco has entered into commitments with respect to trade in services and various trade‐related areas such as payments for current transactions, direct investment, the right of establishment, competition rules, property law, public procurement contracts and standards and certification as well as strengthening co‐operation on immigration and social affairs and cultural co‐operation.

As regards South‐South trade, Morocco has participated in the Agadir Process, signed in February 2004, which seeks to create a free trade area with Egypt, Jordan, and Tunisia. It has not yet gone into effect, pending ratification by Morocco. Morocco has also

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concluded a free trade agreement with Turkey, scheduled to enter into force at the beginning of 2006.

Morocco has signed a free trade agreement with the United States of America, which will allow for 98 percent of two‐way tariff‐free trade in consumer and industrial products. The agreement came into effect in January 2006. The US‐Morocco FTA should play a decisive role in attracting American direct investment and making Morocco a platform for exports bound for Europe and the United States, taking advantage of the country’s geographic location and the Tangiers‐Med harbour complex.

Country risk

In its annual report on Morocco, published in March 2007, Moody’s Investor Service confirms a Ba1 rating for Moroccan foreign debt. The agency considers that notable improvement in Morocco’s external liquidity and acceleration of structural reforms are the reasons behind ongoing reduction in the volume of foreign debt. The Kingdom’s favourable rating is also influenced by its relatively stable political environment. But the report stresses that the economy remains burdened by a high unemployment rate, especially for young people, and heavy dependency on the agricultural sector. On March 26, 2007, Standard & Poorʹs raised the prospect for Moroccan debt in hard currency from stable to positive, after a move in 2005 from BB up to BB+, taking into account the dynamic 2006 GDP growth rate. S&P considers that Morocco’s political stability and monetary policy contribute to better external liquidity for the country. Fitch in April 2007 posts a BBB rate in hard currency and IDR (Issuer Default Rating) in local currency; the short term debt ranking being F3.

Key challenges

The Moroccan economy remains heavily dependent on agriculture (20 percent of GDP, 40 percent of employment), and thus highly

sensitive to weather conditions. Unemployment is high, and the labour force is growing considerably (3 percent), with increasingly broad participation by women in the labour force. Large segments of the population are still socially and economically marginalised, with some 15 percent of the population considered poor. In spite of the progress recorded over the past few years, current economic dynamics are insufficient to maintain employment and meet these challenges. A National Initiative for the Human Development (NIHD) was launched in May 2005, aiming at reducing the social and geographical disparities, developing employment and income, and helping vulnerable populations by means of a participative and transparent process. The total cost of the Initiative over the period 2006‐2010 is estimated at 10 billion dirhams (2 percent of the GDP). The rate of unemployment dropped significantly in 2006 to 9.7 percent at national level, vs. 11.1 percent in 2005, according to the High Planning Commission (HCP). This rate declined to 15.5 percent in urban area (18.4 percent in 2005) and 3.7 percent in rural area (3.6 percent in 2005).

Strong points

Among Morocco’s assets, the low cost and the high quality of labour, the country practises a policy of structural reforms which attract the interest of the investors.

Its political, economic, geographical and financial proximity of the European Union contributes to the dynamism of the economy. Its political stability and its democratic evolution ensure to him the support of the international community.

An offshore financial market was instituted by the Dahir N 1‐91‐131 carrying promulgation of law N 58‐90. This market is opened to banks and holding companies authorised to settle in the country.

The country has some attractive sectors: agrifood, fishing, phosphate, electronics, automotive and aeronautical sub‐

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contracting, textile, clothing and leathers building and public works, tourism, telecommunications, trade, transport. Morocco made great progress in the aeronautical sub‐contracting and near‐shoring (close relocation), becoming the first offshore destination for the French‐speaking market.

The country developed welcoming infrastructure for FDI such as industrial parks, technoparks and free zones for exports and logistics, economic activities zones and company headquarters.

The Department of Investments (DI) Charged since 1996 with promoting Morocco among international operators, the Department of Investments (Direction des Investissements) today actively intervenes in the new framework implemented by the Ministry of Economic and General Affairs.

In 1998, an Interministerial Investment Commission (CII), chaired by the Prime Minister, was established for purposes of appeal and arbitration. It is responsible for making rulings on obstacles to investment projects and for implementing measures to enhance the investment climate.

Sixteen regional investment centres (CRI) have been established since 2002, seeking to decentralise, simplify procedures, and decrease the burden of procedures at the regional level. The two main tasks of these regional investment centres are to assist in setting up new businesses and help investors, each with its own‐targeted services. For example, the facility that assists in setting up businesses is the sole intermediary for new companies. It provides applicants with the information required by law and undertakes the relevant procedures to obtain required documentation.

DI and CRI role

Beyond a mission of information about the potential of the country, the Department of Investments conceives and implements

investment promotion strategies on the targeted segments which encourage the concretisation of projects. Its plan of action in this sense is concentrated around four major orientations:

The identification of the different categories of investors and issuing countries;

The valorisation of priority sectors such as tourism, the NICT, electronic and automobile components and, textiles, aeronautics and agrofood;

The coordination between national institutions and international organisations concerned by investment;

The orientation of projects according to the opportunities offered by the different regions of Morocco in collaboration with the CRIs.

So as to fully play its role of support to the investment policy conducted by the government while continuing the development of its mission, the Investment Department has adopted an organisation which is both transverse and sectoral:

Thus, two divisions cover the domains of Promotion, Communication and Cooperation, Studies and Regulations;

Two other divisions are dedicated to priority activity sectors, Agriculture and Industry on the one hand, Tourism and Services on the other.

For optimal efficacy, these also benefit from the competence of the services charged with Human Resources and General Affairs.

The Department of Investments also provides the Secretariat for the Interministerial Investment Commission, and appeal and arbitration authority chaired by the Prime Minister.

Web site: http://www.morocco‐invest.com

Invest in Morocco

How to invest in Morocco The Kingdom has drawn up a comprehensive strategy for foreign investment promotion based on three main elements: a more conducive institutional and legal framework for international investors, a regional strategy for FDI promotion, and a sectoral strategy based on outsourcing and delocalisation.

This strategy is based on the following fundamental factors: the right to invest, the right to transfer income from investment (profits, dividends, capital) and earnings from sale or liquidation, without any limits on amounts or duration and the freedom to invest without prior authorisation. All industrial sectors are open to foreign investment, except for agriculture, which is regulated by the Dahir law n°1‐69‐25, modified by Dahir laws n°1‐97‐171 and 1‐01‐55, forming the agricultural investments code. Investment in the money market, offshore export zones, or hydrocarbons are also ruled by specific regulations. Acquisition of arable lands by foreign investors is prohibited, but foreign investors can obtain long‐term leases.

The Investment Charter adopted in 1995 provides for additional instruments to encourage investment in the form of contributions and benefits granted by the State to investors. The main incentives are as follows.

Export enterprises are exempt from corporate tax (IS) and the general income tax (IGR) for a five‐year period, after which there is a 50 percent reduction in these taxes.

VAT and licence exemptions are good for five years.

Capital goods, equipment, and tools acquired locally are exempt from VAT.

VAT is suspended for products and services slated for export.

For investment in the province of Tangiers, there is a 50 percent reduction in corporate tax (IS), professional tax and licences.

For investment in the Tangiers free trade zone, there is total exemption of corporate tax for five years and taxation at 8.75 percent for the following 10 years.

Stock option capital gains are taxed at 10 percent, under certain conditions.

Acquisition of land intended for an investment initiative is exempt from registration fees. This exemption also applies to companies investing in areas earmarked for priority development.

Full convertibility in foreign currency is available for foreign investment.

Investment is protected and there is free transfer of capital, tax‐free profits, and revenue from the sale or total or partial disposal of these investments, including capital gains.

Non‐discrimination between foreigners and nationals is guaranteed.

In addition to tax incentives, large‐scale investments (exceeding DH 200 million) are also exempt from import duty and VAT on imported capital goods, equipment, and tools for activities that benefit regional development. In order to boost regional development, the State also assumes part of the cost for developing industrial zones.

In addition to these tax and customs incentives, foreign investors are also eligible for other advantages in targeted geographic and sector‐defined free trade zones. Two types of infrastructure are being developed:

Industrial parks such as Bouskoura, Jorf Lasfar (class A production facilities and controlled pollution) and Meknes.

The Tangiers Free trade zone (which relates exclusively to the exporting companies) and the Tanger Méditerranée harbour

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complex, one of the largest Mediterranean ports at the crossroads between Europe and Africa, on the way between Asia and America, with a potential of 140,000 jobs. The first ships should call in 2007.

Investors can also take advantage of a number of benefits pertaining to customs regimes, such as temporary entry for processing, bonded warehousing and storage, as well as advantages provided under the free export zone regime and the offshore financial centre regime.

Regulations

Moroccan legislation governing companies is covered commercial law (law n°17‐95) on limited companies and law n°5‐96 relating to other corporate structures. Foreign investors can acquire holdings in a Moroccan company or set up a new company. Joint stock companies are the most widespread form of corporate structure in Morocco, along with other forms: limited companies, limited‐partnership companies, stockholding companies) and partnerships (partnerships, joint‐stock limited partnerships).

To assist foreign operators in their investment undertakings, the authorities have adopted a sectoral approach to FDI promotion, based on three target categories: activities related to subcontracting and delocalisation, tourism, and agriculture. 2500 companies in Morocco work in outsourcing, with sales amounting to more than MAD 29 billion (2.6 billion Euros), mainly in the textile‐clothing sector, electrical and electronic engineering, assembly of commercial vehicles and railway equipment, and manufacture of mopeds and private cars. In the tertiary sector, the strategy to promote FDI for the development of call centres has met with great success. In the tourism sector, the “2010 Vision” development plan and the “Azure Plan” are the main vectors for attracting foreign investment and four seaside resorts have been sold off to foreign investors. In the agricultural sector, the authorities attacked

reprofiling of two public companies (SODEA and SOGETA) in May 2003. The restructuring process is at an advanced stage, with an international tender launched at the end of October 2004 for these two companies to sell 205 lots involving 56,497 ha of real estate to the private sector.

The government has also created the Hassan II Fund for Economic and Social Development, which grants direct assistance for investment in industrial sectors with strong growth potential. In addition, the Moroccan Corporate Upgrading Fund “FOMAN” has been launched to help companies with their modernisation efforts.

The 2006 finance law introduced a new taxation code. The corporate tax rate has been 35 percent for profits since 1996, down from the previous 39.6 percent rate, which still applies to insurance companies and financial establishments. Non‐resident construction and civil engineering companies can opt for an alternative tax amounting to 8 percent of the amount of the contract, under certain conditions. Dividends are taxed at the source at 10 percent maximum and this gives rise to an equivalent tax credit.

Company branches and other companies are also taxed. The standard rate for VAT is 20 percent and reduced rates vary according to product and service, for example 7 percent on water, electricity, pharmaceutical products; 10 percent on restaurants; and 14 percent on real estate, coffee, tea…).

In addition to the emphasis on social aspects (5 5percent of the budget), the 2007 finance law brought various tax innovations: tax reductions, the lowering of the VAT rate and the improvement of its management. A more equitable income tax replaces the General Income Tax (GIT). The taxes on labour (employersʹ share of the GIT) are reduced for investors, supporting the recruitment of qualified human resources. This revision also institutes a declaratory mode and the unicity of collection procedures.

Invest in Morocco

The 1996 association agreement with the European Union went into effect in 2000, leading to a free trade area by 2012. A free trade agreement was also signed in June 2004 with the United States, in force since 1 January 2006. The Kingdom is also negotiating several trade agreements targeting regional integration, the so‐called “South‐South” agreements. Morocco is part of the Agadir agreement signed by Jordan, Egypt, and Tunisia in February 2004, ratified by Morocco on July 11, 2006. The Agadir Agreement came into force on March 27 2007 A free trade agreement was also signed with Turkey in April 2004.

Finance & banking in Morocco Since the beginning of the Nineties, the Moroccan financial system has carried out several reforms, which focus on three goals: restructuring of capital markets, liberalisation of financial transactions, and reform of banking legal framework. The 1993 banking law abolished direct credit controls, liberalised interest rates, largely eliminated mandatory bank credit allocations, and introduced an interbank foreign exchange market. These reforms were accompanied by efforts to develop indirect and market based instruments of monetary policy. Liberalisation of the financial sector was undertaken along with strengthening of the financial situation at banks (through restructuring and recapitalisation) and implementation of enhanced prudential regulations and bank supervision in line with international standards, accompanied by privatisation of certain public banks. Legislation has also introduced the concept of “universal bank”, putting an end to the distinction between commercial banks and specialised financial institutions. In January 2005, the government passed a law granting the Central Bank greater autonomy. In addition, in 2005, Morocco passed a comprehensive financial sector law designed to strengthen banking supervision and improve risk management practices in the banking sector.

The 1993 legislation regulates financial companies: consumer credit and leasing companies. The new law is dominated by three new aspects:

Unification of the legal framework governing credit institutions, which now include banks and financing companies

Creation of three institutions: the National Currency and Savings Council (CNME), the Credit Institutions Committee (CEC), and the Credit Institutions Committee (CDEC)

Protection of depositors by a set of measures (compliance with prudential rules, new conditions for activity) and setting up of a deposit guarantee fund

A number of monopolies have been eliminated. This is the case for example for operation of the RME (Moroccans resident abroad) structure, the Popular Credit of Morocco (CPM), and the export insurance activities of the Moroccan Bank for Foreign Trade (BMCE BANK), which have now been transferred to an independent company. Over the past two years, the restructuring and rehabilitation of financial institutions have focused on public sector banks: Banque Nationale de Développement Economique, Crédit Agricole du Maroc and Crédit Populaire du Maroc.

An offshore financial market was instituted under law 58‐90 of 1992 and circular of September 1992. This law introduced an offshore financial market in the municipality of Tangiers, open to banking and trust company activity. Six licensed institutions were operational as of end December 2005.

Moroccoʹs banking sector is fairly well developed and modern. The banking system is made up of the Central Bank, Bank al‐Maghreb, 16 commercial banks (partially owned by or working in partnership with European banks such as BNP Paribas), several development banks, and 36 financing companies. Seven banks

Invest in Morocco

control the market and the principal actor is the Banque Populaire’s network, followed by Attijariwafa, the BNPE and banks controlled mainly by foreign shareholders, including the BMCI (a subsidiary of BNP‐Paribas) and the Credit du Maroc (a subsidiary of the Crédit Lyonnais‐Crédit Agricole Group). The Caisse des Dépôts is extremely active in real estate and tourism, funding public interest projects as well as more modest initiatives.

It is expected that the recent move to consolidate will lead to transition of the sixteen commercial banks into four or five large institutions, leaving only a couple of smaller banks. Large banks will have greater national and regional influence and will be able to underwrite larger projects.

The Moroccan banking system has developed a range of financing options to help promote investment and new businesses, with lending rates freely negotiated between banks and entrepreneurs. Traditional bank loans cover up to 80 percent of corporate needs, with specific credit lines financing 70 percent of the cost of restructuring programmes for SMEs. With regard to micro‐lending and in the framework of the upgrading programme, European credit lines – French, Italian, Spanish and Portuguese – and the Islamic Development Bank have contributed to national financing sources for the development of SMEs. Furthermore, leasing for the acquisition of capital equipment or property for professional use guarantees the rental and financing of up to 100 percent of the cost of acquisition. Capital investment– venture capital, development capital, start‐up capital, and restructuring capital – provides SMEs with fresh capital at the various stages of the development cycle. Under certain conditions, seven‐year loans can be granted as part of an extension to a new partner or shareholder. The European Investment Bank (EIB), a partner in several funds, encourages the setting‐up of such financial instruments in Morocco. There are currently ten venture capital funds. The majority of these funds are of a general nature while others focus on specific activities, in

particular new information and telecommunication technologies, such as the Upline Technologies fund. Mobilised funds came to MAD 1.5 billion in 2000.

During year 2006, many banks launched investment funds, often specialised in key sectors for Morocco: agriculture, tourism, property, ICT, etc. The Central Bank of Morocco gave a green light for so‐called alternative financial products (Islamic financial products) to be introduced in the Moroccan banking sector. On one hand the availability of such offer has become a substantial asset in attracting Arab capital, on the other hand it should satisfy certain customers in Morocco and develop capital venture. In particular, the Moucharaka is a type of private equity whereby the bank takes a stake in an unlisted company, sharing the risk and potential loss, but also the potential profit.

The Casablanca Stock Exchange (CSE), considered one of the most advanced in the Arab world and using the same electronic trading system as the Euronext (Paris) Stock Exchange, prospered in the 1990s, but from late 1998 through 2002 it suffered from long‐lived, severe bear conditions. Market capitalisation passed from MAD 7.7 billion in 1990 (3.6 percent of GDP) to MAD145.1 billion in 1998 (42.2 percent of GDP). Marked rebound in 2003 followed by healthy performance in 2004 and 2005 reflect an upturn in investor confidence. 2005 performance was strong, with MAD 252.33 billion or US$ 29 billion (55 percent of GDP) and 54 listed companies. The capital ratio is on the rise, up 102 percent (14.87 percent vs. 7.36 percent in 2004). The MASI Index rose to 5539.13 points (up 22.49 percent) and the MADEX by 23.8 percent.

Telecom & internet in Morocco Morocco has successfully undertaken major reforms in the telecommunications sector over the past decade. In 1999 the ex‐Office des Postes et Télécommunications was divided into two

Invest in Morocco

entities: Morocco Telecom for telephony and Barid Al Maghrib for postal operations. An independent organisation, the National Agency for Telecommunications Regulations (ANRT), is now in charge of licensing. Under the TELECOM I and II plans, Morocco launched liberalisation of the telecommunications sector.

In 1999, the State granted a GSM licence to Médi Télécom (for MAD10.6 billion), a company newly in competition with Morocco Télécom, and a second block corresponding to 16 percent of capital in Morocco Télécom was sold to Vivendi in 2004, amounting to 51 percent of holdings. ANRT allotted five GMPCS licences (Global Mobile Personal Communications Systems) to Soremar, the European DataCom Maghreb, Thuraya Maghreb, Globalstar North Africa, and Orbcomm Maghreb. Three VSAT cellular telephony licenses were allotted to CimeCom (ex Argos), SpaceCom and Gulfsat Maghreb. Three 3RP licences (Radioelectric Networks with Shared Resources) were allotted to Moratel, Inquam Telecom and Miden. It is also expected that 3G fixed telephony and UMTS licenses will be issued in 2006. A tender was launched in May 2006 for three 3G licences and another one is scheduled for 2007.

The cellular phone market is in full expansion, with a penetration rate of 41.46 percent as of the end of December 2005 (vs. 31.23 percent in 2004 and 9 percent in 2001). There are 12,392,805 subscribers and pre‐paid telephones are used by 97 percent of customers. On the other hand, the penetration rate for fixed telephony is low, estimated at just 4.49 percent in 2005 (1.350 million subscribers). By the end of 2005, there were 262,326 internet subscribers, an increase of 331.4 percent since December 2003. The number of ADSL subscribers is also increasing, posting an annual growth rate of almost 294 percent for 2005.

The internet market is highly concentrated. While Morocco had allowed many (300) small internet service providers to enter the market, there are only two major ISPs: Menara, owned by Morocco

Telecom, and Wanadoo Morocco. Only 1.5 percent of Moroccans use internet and 85 percent of activity is concentrated in the approximately 2020 public‐access phones “cybercafes”.

Foreign companies looking to outsource or move operations to a less expensive location are attracted by Moroccoʹs technological know‐how and infrastructure.

The call centre industry is booming and in just a few years, Morocco has become a leader in offshore French‐speaking call centre activities. There are approximately 140 call centres (according to ANRT), including a hundred outsourcing call centres. There are currently 18,000 positions employing 25,000 agents, as well as indirect employment. Annual growth is estimated at 2000 posts. 85 percent of this turnover is generated through activities with France and Spain. Webhelp has grown to six sites in Morocco, with 600 positions. Phone Assistance has opened an 800‐position site in Marrakech. Atento is opening a new site in Tetouan, and Grupo Konecta has two 500‐position sites. The “SICCAM” (Salon International des Centres de Contacts et dʹAppels du Maroc), international fair has been the key professional meeting of call centres in Morocco since 2004.

Business and investment opportunities in Morocco The range of sectors of interest to investors has expanded from the traditional (energy, textiles, fishing, and agriculture) to those presenting greater added value (such as infrastructure, transport, telecommunications, financial services and others).

The privatisation programme launched in 1993 succeeded in attracting a significant level of FDI inflows to the Kingdom. From 1993 to 2003, some 66 entities were transferred to the private sector, generating MAD 54.7 billion (EUR 5.4 billion) in income from privatisation, of which 82.7 percent were foreign investments.

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Privatisation is of three kinds: tendering (76 percent of the receipts), public offers on the Casablanca Stock Exchange (6.5 percent), and direct attribution (17.4 percent). Morocco is also contracting out certain public utilities to the private sector. The public utilities covered by this new policy include electricity distribution, drinking water supply, sewage treatment and solid waste management, urban public transport, street lighting, and the management of public gardens and parks.

In 2003, FDI flows amounted to MAD 23.5 billion, thanks in particular to the sale of 80 percent of the capital of the tobacco company “Régie des Tabacs” to the French‐Spanish group Altadis (MAD 14 billion) and Renault acquisition of 38 percent of public shares in the Moroccan Automotive Engineering Company SOMACA for EUR 9 million.

By 2004‐05, about half of the 114 public companies targeted for privatisation in 1993 had been sold. The main transactions were sale of 16 percent of Morocco Telecom’s capital to Vivendi Universal (which already held 35 percent of capital) for EUR 2.15 billion, a transaction involving the Popular Central Bank, the transfer of all public shares in the four sugar companies Surac, Sunbel, Suta and Sucrafor to the Moroccan group Cosumar for a total amount of MAD1.4 billion, the sale of 80 per cent of “Régie des Tabacs” tobacco company capital for MAD 14 billion, and the MAD 95 million purchase of 26 percent of SOMACA automotive construction company capital. Other privatisation transactions were carried out at the end of 2004: the fertiliser producer FERTIMA was sold for MAD 14.1 million, SONIR printing works for MAD 22 million, and 40 per cent of COMANAV shipping company stakes was also sold off.

New investment prospects are available thanks to privatisation transactions in the pipeline, concession of public utilities to the private sector, and the development of franchising.

The authorities have programmed deregulation of certain sectors, with deregulation of electricity planned for 2005 expected to lead to establishment of both a regulated market and a free market that will share access to ONE’s grid. In the field of transport, the state railway company (Office National des Chemins de Fer) has become the Société Marocaine des Chemins de Fer and the former public body is now a joint stock company, opening the way to deregulation of railway management through concessions for the management of railway infrastructure and operations.

As for ports and shipping, a reform is planned that will split the Office d’Exploitation des Ports into two entities: the Agence Nationale des Ports, which will act as port authority, and the Société d’Exploitation des Ports, which will be responsible for commercial functions, the introduction of competition between and within ports, and unification of cargo‐handling services. A new deregulation policy has been instituted in air transport, based on the objectives set out in the Plan Azur (notably increasing the number of passengers to 15.6 million by 2010) and targeting deregulation of the regular flight market on a controlled, voluntary basis as well as limited deregulation of the charter market.

The telecommunications and ICT sector offers many opportunities. Morocco has a large pool of relatively cheap and well‐qualified French and Spanish speakers and good telecommunications infrastructure. The launching of economic zones will help with offshore business processes and IT operations and in attracting a handful of multinationals to the country. Liberalisation of telecommunications should attract new operators and market development will require more investment in infrastructure (equipment, software) and services (software development, integration, consulting and training). A study published by McKinsey at the request of the government, which provides a roadmap for industrial policy, outlines nearly 700 measures to be taken and stresses eight sectors with strong potential: textiles and

Invest in Morocco

clothing, craft industry, food processing, fishery processing, outsourcing activities, automotive industries, electronic equipment and aeronautical subcontracting. McKinsey proposes a set of transversal measures, more specifically development of these last three sectors based on a concept of Mediterranean “maquiladoras” profiting from tax and logistic advantages. Successful implementation of this strategy would meant 250,000 direct new jobs by 2012 and GDP growth of 6 percent.

Transport

The country has a network of more than 500 km of highways and 11,000 km of national roads. The government needs to invest 2.2 billion Euros to upgrade road infrastructure in the framework of the second national programme to build rural roads (PNRR‐2). PNRR‐2, which seeks to provide transport for some three million people at a rate of 300,000 a year, targets the construction and improvement of 15,500 km of roads between 2005 and 2015. The first National Programme of Rural Roads (PNRR‐1) was launched by the Moroccan government in 1995, programming action that has become necessary to meet the challenges facing the Moroccan road network, including under‐development, limited rural accessibility, weak maintenance, and severe weather conditions.

In addition, the programme plans to upgrade some 1100 km of roads, repair civil engineering structures, rebuild works, renew public works equipment, carry out technical and feasibility studies for new projects, upgrade access by road to Casablanca (increase capacity, add intersections, create underpasses, build new exchanges…)

As for motorway projects, MAD 15 billion will be invested from 2005 to 2009 for the construction of stretches from Had Soulem to Tnine Chtouka (35 km) and Tnine Chtouka to El Jadida (28 km); the building of new sections from Casablanca to Reduction (30 km), Tetouan to Fnideq (28 km), Settat to Marrakech (143 km); a bypass

around the port complex of Wadi‐Rmel (54 km); and construction of the Marrakech‐Agadir motorway, which is part of the Tangier‐Marrakech‐Agadir network. The Fes‐Oujda run is scheduled to take place over the period 2006‐10 and some MAD 5 billion is earmarked for completion of the Mediterranean bypass.

The national railroad authority “Office National des Chemins de Fer” (ONCF) currently manages overall rail traffic in Morocco, operating a 1907 km rail network. Its 2005‐2009 investment budget amounted to MAD 15.5 billion, including almost MAD 1 billion in capital expenditure. The TSRP includes various measures to upgrade the sector, including acquisition of 18 multi‐unit trains, double tracking of the rail network up to Fez, Settat and Jorf Lasfar. Projects under way also include extension of the overall rail network to add new links to Nador and the Tangiers‐Med port and to upgrade existing train stations.

Morocco plans to extend port capacity, encourage greater private sector participation in commercial port activities, reduce port transit costs, and strengthen the competitiveness of national shipping lines. Morocco launched construction of the Tangiers international port “Tangiers Mediterranean”, awarded to Bouygues Holding. Located on the Straits of Gibraltar 35 km east of Tangiers and 15 km from Europe, the Tangiers‐Med project is a Special Economic Zone at the crossroads of major shipping lanes. Scheduled to be completed by 2007, the project includes a multi‐purpose harbour, several customs free zones, and modern transport and service infrastructure. The Tangiers‐Mediterranean Special Agency (TMSA) is in charge of carrying out this undertaking, at a cost of MAD 11 billion. Operation of the first container terminal has been awarded by tender to a consortium led by Maersk in partnership with the Moroccan conglomerate Akwa and the second terminal has been awarded to the Eurogate‐Contship consortium (German‐Italian), Comanav (Morocco), MSC

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(Swiss) and CMA‐CGM (France). Other tender offers will soon be launched for the petrol and truck‐loading terminals.

ODEP announced a plan for MAD 2.7 billion in investments over the period 2003‐2007 to extend Casablanca’s east terminal, with work beginning the end of 2003. Equipment at the Jorf Lasfar port will be extended and strengthened and the port of Mohammedia will also undergo major work (extension of dams and quays).

The national airport authority (ONDA) is in charge of managing the civil airport network, made up of 17 airports, 10 of which accommodate international flights. The period 1992‐2002 was devoted to rehabilitation of infrastructure and more precisely construction and equipping of the Nador Airport, construction of the Fes air terminal, extension of the Marrakech Airport, and extension of JRC‐type radar coverage.

In the framework of the “2010 Vision” strategy, which aims to accommodate 10 million tourists by 2010, ONDA is committed to liberalising the sector, ending the monopoly long held by Royal Air Maroc, and reducing ground service costs. Partial air‐sector liberalisation was launched in February 2004. These reforms are meant to make Casablanca’s Mohammed V Airport a hub for the entire North and West African region as well as to help the Kingdom achieve its goal of attracting 10 million tourists by the year 2010. ONDA will invest MAD 3 billion over the period 2004‐2007 for construction of the new terminal at the Mohamed V Airport, extension of airports at Tangiers, Essaouira, Errachidia and Al Hoceima, and acquisition of radar and navigational equipment to improve airport safety and security.

Tourism

With 5.8 million tourists in 2005 using the country’s accommodation capacity of 124,000 beds, tourism is the second source of foreign currency for the Moroccan economy.

The “Vision 2010” development strategy has been launched, with the goal of quadrupling tourist activity by the end of 2010 to 10 million tourists, doubling hotel capacity to 115,000 rooms (250,000 beds), developing seaside resorts (construction of six new world‐class establishments with 160,000‐bed in proximity to the country’s airports), and diversifying tourism products. A budget of EUR150 million is planned for hotel renovation. The approach adopted for creation of this additional capacity is to develop integrated tourist zones and meet new tourist demands by promoting private partnerships through tenders.

The Department of Tourism has launched a number of initiatives, such as the “Azur Plan” to build six new integrated seaside resorts (Saidia, Lixus, Mazagan, Mogador, Taghazout and Plage Blanche). Four have been awarded to international developers: Saidia (Spanish group FADESA), Mogador (Thomas & Piron/ lʹAtelier/ Colbert Orco/ Risma), El Haouzia (Kerzner International/ Somed/ CDG/ Mamda & MCMA), and Lixus (Thomas & Piron/Orco). An invitation to tender was launched in May 2005 for upgrading of the Taghazout site and final selection will be made at the beginning of 2006. Leasing of the “Plage Blanche” site was launched in 2006.

The government has also launched plans to update the tourist zones of Aguedal (Marrakech) and Ghandouri (Tangiers), to be handled by Morocco Hotels and Villages (MHV), a subsidiary of the “Caisse des Dépôts et Consignation”. In parallel, the Department of Tourism started building sites for the upgrading of current destinations such as Fes, Casablanca, Agadir, Tangiers, Tetouan, etc., in the framework of the Regional Development Programme (PDR). Major United Arab Emirate investment initiatives were announced at the beginning of 2006.

National tour operators set up a new private low‐cost airline “Jet4you” at the end of 2005, with 40 percent of capital held by foreign investors. This gives concrete form to the principle of

Invest in Morocco

liberalisation affirmed by signature at the end of 2005 of the “Open Sky” global air traffic agreement by Morocco and the European Union.

Prospects for construction and civil engineering are encouraging, with implementation of social housing programmes and building of basic infrastructure to mitigate the problem of urbanisation and housing deficits. The Kingdom has decided to create two new cities close to Marrakech (Tamansourt) and Rabat‐Sale‐Temara (Tamesna). The Ministry of Housing will carry out urban studies to review the status of real estate and arrange for off‐site facilities, while private promoters will be in charge of construction (in particular at Addoha, Chaabi Liliskane and Chaima).

Other initiatives relate to development of the Bouregreg Valley, which includes construction of two marinas, setting up of an arts and handicrafts complex, esplanade, bridges and a tramway as well as an economic and cultural area and man‐made lake surrounded by a technopark, a sports city and irrigation system, development of urban spaces, etc. The cost of this initiative is estimated at MAD 10 billion.

The housing sector, characterised by serious shortages and new needs growing far more rapidly than the current rate of new housing, is the object of government plans to double annual production in order to reduce these deficits, estimated at 900,000 units by 2007 and 570,000 by 2012.

It is projected over the medium term that annual production of low cost housing will need to double to 100,000 units per year in the form of equipped or semi equipped lots for individual homes and finished or semi‐finished residences and by reorganising certain districts. Furthermore, a national programme (“Slum‐free Cities”) has been set up to eliminate sub‐standard housing, estimated at a

cost of MAD 17.1 billion. Some 1.5 million people live in nearly 1,000 slum areas.

Under this programme, private individuals who cannot qualify for bank loans will be able to obtain funding to be repaid over a period of 20 to 35 years. Nearly 5,600 hectares of land have been released and aside from funding for low cost housing, the State has adopted a policy of tax exemption and tax breaks in favour of land promoters who commit to building at least 2,500 homes over the next five years. This initiative hopes to meet the housing needs of low‐income segments of the population and thus improve living conditions as per Ministry of Housing priorities. It also aims at encouraging the private sector to participate in the construction of low‐cost housing.

Energy and mining

Morocco’s overall energy consumption stands at 11.4 million Mtoe, having increased by 3.3 percent per year over the period 1999‐2003. It is estimated that power consumption will reach 17 million Mtoe by 2015. Morocco is strongly dependent on oil and, to a lesser extent, on coal for the production of electricity. Other sources of energy remain weak and the country depends on imported energy products for more than 85 percent of its consumption.

Hydrocarbons

The national gas project intends to build a gas pipeline to tie into the Maghreb‐Europe gas pipeline (GME), crossing Morocco for 540 kilometres and connecting to Algerian and Iberian networks. The first will go through Ouezzane, Mohammedia and Casablanca to Jorf Lasfar and the other will cover areas close to the GME. A tanker terminal for methane will be installed at Mohammedia and underground storage is also envisaged. The cost of this development programme is estimated at MAD 4 billion (EUR370 million). The National Hydrocarbons and Minerals Office has

Invest in Morocco

stepped up its promotional efforts to attract foreign investors. New agreements have been signed, increasing to 26 the number of companies prospecting for hydrocarbons in Morocco over an estimated area of 107,000 km2 offshore and 23,000 km2 onshore.

Phosphates Morocco possesses 75 percent of the worldʹs known mineable phosphate reserves. The “Office Chérifien des Phosphates” (OCP) is in charge of operating these phosphate mines, then processing, producing and marketing by‐products (phosphoric acid, fertilisers…), of which it is the number one world exporter. Phosphate exports account for 17 percent of Moroccan exports and constitute an important source of foreign currency for the country. The OCP has modernised its processing sites at Jorf Lasfar and Safi and built a new processing line for phosphoric acid and sulphuric acid. Over the period 2004‐2008, MAD 12.8 billion in new investments are planned, in particular for construction of a phosphoric acid production unit, a DAP fertiliser production unit, acquisition of trucks, various machinery, receiving hoppers and connection conveyors for the new mine and a phosphate washing and flotation unit. To select its suppliers, the OCP proceeds on the basis of restricted calls for bids to pre‐qualified companies.

Electricity

The demand for electricity is increasing by 5 to 8 percent per year and Global Rural Electrification Programme (PERG) targets a rate of household connection at virtually 100 percent by the end of the decade. The National Electricity Board (ONE) has launched an ambitious investment programme (MAD 11.32 billion invested between 1999 and 2003) to carry out a large number of initiatives such as the Tahaddart power station (MAD 2.4 billion), doubling of transit capacity to and from Spain (MAD 1.34 billion), strengthening of the network with a new sub station (MAD 1.13 billion) and construction by Alstom Power of a STEP (transfer of

energy per pumping station) facility at Afourer (MAD 1.7 billion). From 2004 to 2007, ONE will invest a further MAD 18.2 billion for construction of new production sites, notably construction of a thermo‐solar power station at Ain Beni Mathar, wind farms near Tangiers and Essaouira, and modernisation of a power station in Mohammedia.

The availability of water in Morocco is very uneven from one area to another, ranging from the relatively favoured north‐western part of the country under the influence of the Atlantic Ocean to the very arid regions of southern and eastern Morocco. Morocco’s climatic and hydrological systems are also subject to cyclical variations, generally several years of drought followed by wetter conditions.

Water resources are thus a major concern for Morocco. Nearly 90 percent of resources are already mobilised and they are being seriously degraded by domestic, industrial, and agricultural pollution. Only 5 percent of urban effluents are treated. The promulgation of ”water” law 10‐95 in 1995 constitutes the starting point of a new national water policy. It addresses fundamental issues ranging from water resource planning and management, institutional reform, the transition from supply to demand management, the development of a reservoir management strategy, application of ʺuser‐paysʺ and “polluter‐pays” practices and promotion of dialogue between users and operators in the sector.

A new National Water Plan is being drawn up to outline future strategy for water management and climate and environmental protection. One aspect of reforms undertaken by the Ministry in charge of Land Development, Water and Environment will help Morocco control its water resources and supply in both urban and rural areas, “in order to have an integrated strategy over the medium and long terms with regard to management of water reserves”.

Invest in Morocco

Another aspect focuses on controlling pollution through development of a national programme to improve and maintain water quality, fight pollution of underground reserves, develop domestic and industrial wastewater treatment and decentralise management of these resources over the next ten years. The budget allocated for this programme is set at MAD 43 billion, 30 percent in State funds. The programme should reduce the pollution rate by 60 percent by 2010 and 80 percent by 2015. The third aspect of the programme relates to rational use of water and the fourth concerns integrated, decentralised and partner‐based management of water resources.

Agriculture and agrifood

Agriculture plays a major economic and social role in Morocco, largely contributing to efforts under way for several decades in the Kingdom to boost economic performance. Morocco depends heavily on its agricultural sector, which generates 15 to 20 percent of GDP (depending on the harvest) and employs some 40 percent of the labour force. More than 90 percent of the country’s crops receive no irrigation and production is very uneven. Although agriculture is so important for Morocco, only 19 percent of land area is cultivated, producing barley, corn, citrus and other fruits, wine, vegetables and cattle. Morocco is a net exporter of fish as well as fruit and vegetables, but it imports many cereals, oleaginous seeds, and sugar.

To tackle the water management problem, the government, with the support of the International Financial Corporation (IFC), has recently signed a partnership with ONA to construct and manage an irrigation network to channel water from a dam directly to farmers, providing them with water at lower prices than those they currently pay. In addition, the government launched a new plan in 2005 to upgrade the agricultural sector and resolve the crisis currently faced by the sector.

Morocco enjoys a highly dynamic fishing industry that employs some 400,000 people (directly and indirectly). With 1835 km of coastline along the Atlantic Ocean and the Mediterranean Sea, fishing generates approximately 15 percent of Morocco’s agricultural GDP per annum. The principal fishing centres are Agadir, Safi, Essaouira and Casablanca and catches include sardines, tuna, mackerel, anchovies as well as shellfish and molluscs. A large portion of Morocco’s fish is processed (i.e. frozen or tinned) for export, mainly to Europe. The new fishing treaty signed by Morocco and the EU to replace the treaty that expired in November 1999 will come into effect in March 2006, granting EU trawlers access to Morocco’s Atlantic waters for four years in return for an annual payment of EUR 36 million.

Food processing is Morocco’s principal industry, a strategic sector able to meet the food needs of a fast growing population and to generate economic activity based on export. The industry currently generates turnover of approximately US$ 5.6 billion, representing nearly US$ 1 billion in exports and providing 60,000 jobs. There are 1700 companies in the sector, accounting for 25 percent of overall industrial plants. Almost all branches of the industry are represented: processing of cereals and sugar, dairy products, vegetable and animal oils, canned fruits and vegetables, beverages, baked goods/sweets/chocolates. Morocco’s agrifood companies are currently working on upgrading their equipment and processes to improve competitiveness and output and to align to sound manufacturing practices and international operating procedure standards. The sector is also being liberalised and agricultural authorities recently launched a number of invitations to tender. The sugar sector has been entirely privatised. Moreover, the State provides local or foreigner investors with land in the form of long‐term leases to carry out investment initiatives.

Invest in Morocco

Retailing and modern distribution

The market for modern organised retailing is being structured. Over the last few years, a number of modern self‐service retail outlets (including convenience stores) have opened in major cities, and this trend is likely to continue. The retail food sector has progressed significantly over the past ten years, as modern, spacious supermarkets opened in major cities, increasingly changing the shopping habits of the majority of urban consumers throughout Morocco.

The country counts 200 supermarkets (more than 300 m2) and 17 hypermarkets, including six cash & carry facilities. European multinationals have invested heavily in Morocco’s modern distribution chain in Casablanca, Rabat, Marrakech, and some other large cities, accounting for about 10 percent of turnover. Three successful international retailers—Metro, Auchan and Casino—have captured about 17 percent of the retail market. Auchan took control of 49 percent of holdings in the local supermarket Chain Marjane, the first independent store in Morocco. These retailers sell local products.

Although there is still room for new entries on the market, success depends on building strategic partnerships, as is the case for Auchan. In the area of specialised retailing, the do‐it‐yourself market is being structured with the entry of Bricorama, Mr. Bricolage and Weldom. This also holds true for household appliances and to‐be‐assembled furniture. The Moroccan retailer Kitea, with 21 stores, was the first to enter the market, then followed by Mobilia, Layalits, Kaoba, Kit Express and the Turkish firm Cilek. Yadeco, a new distribution chain for furniture and equipment, opened three outlets in 2005.

Textiles-clothing

Textiles and clothing is a major sector for the country’s economy. It is the foremost industrial employer, providing 200,000 jobs to 40

percent of the labour force. The multifibre agreements that governed world trade in textiles and clothing for thirty years were phased out on 1 January 2005. According to a Ministry of Finance and Privatisation study entitled “what is at stake for Morocco in dismantling of the MFA”, the loss of preferential conditions enjoyed by Morocco on the European markets will exacerbate competition from Asia, but Morocco retains a number of assets: undeniable cost competitiveness for certain products; proximity (an advantage for small series, with quick turn‐around time in response to tailored requests); and a reasonable degree of competitiveness comparing to Chinese similar exported products.

To face international competition, Moroccan operators have worked out a comprehensive strategic plan based on competitiveness and quality, targeting greater added value in production and a policy of vertical integration. Priority action relates to a higher level of fabric upgrading, additional investment, greater efforts in innovation and R&D and implementation of training cycles, the transition from subcontracting to co‐contracting, improved retailing networks, and investment in information technologies to optimise techniques and allow better management of orders and turn‐around time.

The government and the Moroccan Association of Textiles (AMITH) signed an agreement in October 2005, the “Textile and Clothing Emergence Plan” to modernise Morocco’s textile and clothing industry. It offers an array of measures and facilities to support corporate restructuring programmes aimed at capacity building in marketing and promotion, investment and partnership promotion, and materials sourcing. A special fund (FORTEX) has been set up with EUR10 million Euros. The industry was also been reorganised in four branches (chain and screen, mesh, jeans and sportswear, household linens) in order to target marketing strategy and boost synergy.

Invest in Morocco

The free trade agreement recently signed with Turkey, a major producer of textiles, will support vertical integration since it allows Moroccan companies to buy textiles from Turkey while complying with the European Union’s rules of origin. With Moroccoʹs free trade agreement with the US in force since January 2006, the new Tangiers Med port, which is expected to be operational by the second half of 2007, should allow Morocco to tackle the US market in the same way, as goods will reach the east coast of the US in roughly a week, thanks to improved connections.

High technology industries

The high technology sector is booming in Morocco as a result of government incentives and the decision by large international groups to set up maintenance and microelectronic component assembly operations in Morocco. This strategy is based on the availability of high‐level facilities and technicians in Morocco. Sectors like electronics, in particular the production of electronic components, have high potential for exports. Mono and multi‐layer printed circuits, passive and active components, converters, and telecommunications equipment are real investment opportunities, in particular in subcontracting for export. Other sectors, such as automotive industries, precision mechanics, the aeronautics industry, as well as industrial research and development are growing steadily thanks to relocation trends. The State is supporting investment in these sectors through the Hassan II Fund.

After the national ICT strategy, baptised E‐Morocco, the country launched the Progress Contract 2006‐2012, relating to the implementation of a strategic vision for the development of the sector. This contract was signed on September 20, 2006 between the Government and Apebi ‐Moroccan Federation for IT, Telecommunications and Off‐Shoring‐ a representative of private ICT professionals. The contract aims to enhance ICT sector growth and to promote Morocco as an off‐shoring destination. The main

innovation is undoubtedly the support for innovation and creation of added value. The State launched a fund intended to facilitate the access to financing for ICT companies (100 billion DH to be raised according to needs).

Success story: Telefonica invades the Moroccan telecom market Following the opening up of the telecoms market to the private sector and thanks to a record offer, a Telefonica‐led consortium acquired in July 1999 the second GSM licence for a cost of 1.1 billion US dollars (the equivalent of 10.8 billion DH). Medi Telecom (Méditel) then became the competitor of the historic operator Maroc Telecom in the mobile telephone industry.

After a successful bid for Morocco’s second fixed telephony license in July 2005, implying a DH 5 billion investment plan over 3 years, and the acquisition for DH 320 million of a UMTS license in July 2006, Méditel rapidly took its place as a major telecoms player in the Kingdom. As of December 31st 2005, it claimed 4 million mobile phone subscribers, while the commercial launching of its fixed telephony services in May 2006 prevents Meditel from giving any significant figure for 2006 in this sector..

Telefonica, via its operational division Telefonica Moviles, together with Portugal’s PT Moveis, both owners of a 32.18% stake in Méditel (while the rest of the capital is held by Moroccan partners), is happy to reap the benefits from its massive investments into Moroccan telecoms infrastructures.

The Spanish giant is also active in the call centre business, through Atento Marruecos, Telefonica’s Atento local subsidiary, present in Morocco since 2000. With three hubs at Casablanca, Tangiers and Tetouan, Atento has more than 1,000 positions (telemarketers) and is in consequence one of the main players in the sector. The creation of 230 extra positions is planned for Tangiers. The investment

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amounts to 80 million DH (7.5 M €) for each centre. Atento Marruecos has among its clients, Méditel, Royal Air Maroc and Crédit du Maroc.

Palestinian Authority (West Bank and Gaza)

Overview

References

Seat of the Palestinian Auth. Ramallah Claimed capital Jerusalem East (Al Quds) Population (Source: Palestinian Central Bureau of Statistics)

3.8 million inhabitants (2,4 million in West Bank and 1.4 million in Gaza (end of 2005) Growth rate: 4.91%

Languages: Arabic (official) English (population generally conversant) French, German, Hebrew, Italian, and Spanish are widely spoken

GDP per capita US$ US$ 1,146 (2004) GDP US$ 4,011 million US$ (2004) Religion Muslims, Christians, Jews Time of Work 1. The government sector: from 8:00 am to

2:30 pm 2. The private sector from 8:00 am to 4:00 pm

Time zone Time Differential from GMT is +2 Currency No local currency. Currencies used: new

Shekel NIS, US dollar, Jordanian Dinar Association agreement with EU

Interim agreement since /07/1997 EU web site: http://www.delwbg.cec.eu.int/

WTO membership Observer since 2005

Invest in the Palestinian Territories

Economic profile

After nearly four decades of war and occupation and five years of conflict and destruction since the second intifada, the disengagement of Israel from the Gaza Strip in 2005 has created the groundwork for a possible improvement in the situation. Efforts by Palestinian authorities to establish the foundations of an “economically viable” State parcelled out and divided between non‐contingent zones are more than ever challenged by a political context and institutional architecture that do nothing but increase Palestine’s vulnerability and dependency on Israel and international assistance.

The Oslo agreements created a climate of optimism in the Palestinian Territories, resulting in strong economic growth, with regular increases in GNP (recording 8.4 percent in 1999) and an unemployment rate of 11.9 percent. But since the start of the second intifada at the end of September 2000, economic activity in the Palestinian Territories has been seriously undermined by the explosion of violence and Israeli military response, in particular the system of internal closure of the Palestinian territories and withholding of tax revenues collected by Israel on behalf of the Palestinian Authority (some two thirds of its tax resources). By the end of 2002, GDP per capita had fallen by 39 percent. Tax transfers and assets blocked since December 2000 were finally released starting in November 2002.

Palestine’s economy slowly started to recover, with GDP growth of 6.1 percent in 2003, 6.2 percent in 2004 and 6.3 percent in 2005, according to the World Bank’s Economic Update and Potential Outlook of 15 March 2006. Several factors contributed to sustained recovery, in particular over the first three quarters of 2005: robust growth in the Israeli economy and growing trade between the Palestinian Territories and Israel, increased international assistance, more bank loans to the private sector, an increase in the number of Palestinians employed in Israel or in the settlements (some 64,000

at the end of 2005, up from 50,000 at the end of 2004 but considerably less than the 116,000 recorded at the end of 1999), and sustained high growth in the building sector (+ 25 percent, 13 percent of the labour force).

In spite of these favourable developments, per capita GDP remains 30 percent lower than in 1999, unemployment stands at 25 percent and the poverty rate at 43 percent (at least 15 percent living in conditions of extreme poverty). Public investments financed before the crisis by international assistance are also hampered. Indeed, increasing difficulties in implementing infrastructure projects led international donors to reduce their commitments to development projects (US$ 238 million in 2003 vs. US$ 852 million in 2000), shifting funds to emergency aid.

Palestine’s economy in the West Bank and Gaza is concentrated primarily on services. The country has limited natural resources, but the population is well educated and labour is highly skilled. Agricultural activities, including fishing, are gaining importance in the Palestinian economy. The major agricultural products include olives, citrus fruits, flowers and vegetables. The industrial sector is based primarily on small establishments that produce agricultural products, shoes, and clothing. The Palestinian economy enjoys a considerable volume of remittances from expatriates and companies operating abroad. The country also has a promising tourism sector.

According to UNCTAD statistics and the Palestinian Central Bureau of Statistics (PCBS), the various economic sectors contributed to GDP in 2004 as follows:

Agriculture and fishing: 12.4 percent of GDP, employing almost 15 percent of the population and providing a quarter of total exports (fruits, olives, olive oil, vegetables and cut flowers);

Mining, manufacturing, electricity and water: 15.7 percent of GDP, employing 12.7 percent of the population;

Construction industry: 3.3 percent of GDP;

Commerce, hotels and restaurants: 15.2 percent of GDP;

Transport, storage and communications: 11 percent of GDP;

Services and miscellaneous (including public administration): 42.4 percent of GDP.

In terms of added value, industries are classified in the following order: textiles and clothing (23 percent), non‐metal products (21 percent), metal products (13 percent), foodstuffs and beverages (12 percent), machinery and equipment (9 percent), shoes and leather (4 percent). There are 117,000 industrial companies, 91 percent of which are private, and more than 90 percent are very small companies with a maximum of 4 employees.

At the end of 2005, the results of the seven year Economic Policy Programme “Towards an economically‐viable Palestinian State” under the aegis of the London School of Economics in coordination with the Ministry of National Economy (MNE) were published.

The objectives of this three‐phase programme were to provide technical assistance to the Ministry of National Economy and the Palestinian Authority (PA) in preparation for the emergence of an economically viable Palestinian State, to examine options for permanent economic statutes, to prepare legislation compatible with WTO rules and a sovereign framework for trade to replace the Paris Protocol. During phases I and II, the MNE and experts focused on the development of trade with Israel, technical preparations for negotiating trade agreements with third parties, as well as a Palestinian request for observer status at the WTO.

Net imports from Israel represent two thirds of the total trade deficit. For the last five years, the deficit in Palestine’s trade balance with Israel ranged between 32 percent of GDP in 2002 and 40

percent GDP in 2004. These figures can be explained in particular by the fact that the Palestinian economy is almost totally dependent on just one market: Israel. Trade with Israel has represented 67 percent of Palestine’s exports and imports, whereas imports from Palestine account for only 2.3 percent of Israel’s trade.

Palestinian exports brought in US$ 449 million in 2004, 93 percent to Israel, with basic commodities accounting for approximately 80 percent of this total (US$ 360 million). Exported services, amounting to US$ 29 million, go solely to Israel, an increase of 22 percent thanks to strong growth in telecommunication services (+ 153.5 percent). The Palestinian Territories’ top 10 suppliers in 2003 were Israel (72.75 percent), Turkey, China, the US, Italy, the United Kingdom, Jordan, Spain, France and Germany. Its top 10 customers in 2003 were Israel (91.53 percent), Jordan, the Netherlands, Saudi Arabia, the United Arab Emirates, Italy, the United Kingdom, the US, Belgium and France.

Key challenges

As a result of the current crisis, the economy of the West Bank and Gaza is clearly shifting to a new growth trajectory. Closely integrated with Israel since 1967, the Palestinian economy enjoyed modest growth in real per capita income and significant declines in unemployment following signing of the Paris Protocol in 1994. At the same time, high levels of remittance from Israeli employment, restricted trade relations and significant donor aid inflow contributed in part to an expansion of the non tradable sector, particularly the government wage bill, declining competitiveness in the tradable sector and higher costs of production, particularly domestic labour (World Bank 2002 ”Long Term Policy Options for the Palestinian Economy”, and IMF 2001 “West Bank and Gaza: Economic Performance, Prospects and Policies”).

Periodic closure worsened growing imbalances in the Palestinian economy, further weakening the economy’s ability to move itself to

a more sustainable growth path. Following the outbreak of civil conflict in September 2000 and heightened Israeli security procedures, significant declines in trade, employment, investment have contributed to decline per capita income of 48%.

Since September 2000 and the intensification of the closure regime, private firms face even higher transport costs, physical losses to capital equipment, diminishing market share and credit shortages. The private sector has borne the brunt of physical damage, estimated to be as high as US$ 728 million, with foregone investment opportunities totalling US$ 3.2 billion. The situation is particularly acute for firms in vulnerable sectors such as tourism and traditional industries—food processing, sewing and furniture—while pharmaceuticals, information technology and handicrafts appear to be surviving the current crisis more readily.

Strong points

Palestine, with its strategic location and need for widespread infrastructure development is an untapped emerging market with enormous investment potential. The Palestinian economy is a market‐based economy with the private sector playing the leading role. The Palestinian Territories benefit from the high quality of Palestinian labour, from the existence of a large diaspora, and the financial support of a number of States.

The Palestinian economic strategy being developed is export‐oriented and outward looking. The Palestinian economy has already begun the process of integrating with regional and international economies through a network of free trade agreements and trade associations.

Current short‐term goals focus on improving access to foreign markets and overcoming the obstacles hindering the movement of people, goods and services to these markets.

Palestine Investment Promotion Agency (PIPA)

In 1998, pursuant to the Promulgation of the Investment Promotion Law, the Palestinian Investment Promotion Agency was established as an autonomous agency of the Palestinian National Authority. The law not only established PIPA, but it provided the bylaws by which PIPA would operate. A One‐Stop‐Shop was established to assist all investors from licensing their projects, getting approvals, to acquiring incentives and income tax exemptions.

PIPA’s goals and mandate

PIPA’s mandate goals and responsibilities are to:

1. Increase the flow of foreign and domestic investments in line with national priorities;

2. Provide employment opportunities pursuant to increased investment and developmental activities;

3. Expand Palestinian exports and increase flow of foreign exchange;

4. Ensure the transfer of modern technology in all priority sectors;

5. Determine deficiencies in Palestinian Investment Climate and seek, through its Board of Directors, to influence Government decisions promoting investment‐friendly policies.

One-Stop-Shop

Once the decision to invest in Palestine has been made, PIPA is the one place investors should go to for everything they need to begin working. Its One‐Stop‐Shop, launched in 2005, provides all the necessary forms, and is committed to deal with all this paperwork

in a timely manner (less than a month, and less than 10 days will be the next step).

PIPA & After-care investor support

Once a project has received all the official assistance available, be it’s incentives, or permits and income tax exemptions, PIPA’s usefulness does not come to an end. After‐care may not be as important a function for more economically stable regions og the world, but here PIPA views this function as key. PIPA continues to provide assistance to investors in any matter where it can be of service. One significant area where PIPA can help is in proposing changes to laws and regulations which may be restricting investment thanks to the feedback it receives from investors on the ground.

The institutional aspects

PIPA is headed by a thirteen‐member Board of Directors. Five of these members are drawn directly from the private sector, while the rest is from the public sector. The Board of Directors is chaired by the Minister of National Economy, with a representative of the Ministry of Finance serving as deputy chairman. This detail, in combination with the addition of direct private sector input, allows both for changes to be made to the investment laws itself, and the monitoring of all Palestinian laws and regulations which may be imposing restrictions or limitations on investments.

The additional benefit of having members of the private sector serving on the Board is precisely to keep in constant touch with entrepreneurs’ concerns and maintain a closer ear to the ground. The public sector board members provide a valuable link to the internal developments and new initiatives within the Ministries of Tourism, Industry, Housing, Planning and International Cooperation, Monetary Authority and Agriculture. Close

cooperation also ensures a unified promotional and strategic front, while keeping and eye on developments within these sectors.

http://www.pipa.gov.ps/index.asp

How to invest in the Palestinian Territories To begin with, here are some elements of the Palestinian strategic offer:

Free Trade Agreements with the US, EU, EFTA, Canada, Russia, Jordan, Saudi Arabia, Syria and Egypt;

Special Trade Agreement with Arab League Nations;

Equally favourable incentives for international and local investors;

No restrictions on profit and capital repatriation;

Free movement of currencies;

Free Industrial Zones;

Regionally competitive investment promotion and Free Zones laws;

Business support firms, consultancy firms, secondary businesses, IT universities, etc;

A skilled workforce, often conversant in English.

The Palestinian Authority has created a framework of economic legislation to encourage and support foreign and local investment in Palestine. The 1998 Law on Encouragement of Investment provides incentives for capital investment in all sectors of the Palestinian economy by both local and foreign corporations registered to do business in Palestine.

The Palestinian Authority hopes that increasing capital investment growth will generate jobs and help develop an export‐oriented

manufacturing base. Law n°10 governs investment in industrial parks and free trade zones. A foreign investor can own a company without the obligation of having a local partner. Currency can be freely transferred and profits freely repatriated.

Jordanian legislation dating back to 1964 governs the setting up of new businesses in the West Bank, except for those in non self‐governing areas of the West Bank, which operate under the Israeli military ordinance of 1970. Corporate legislation dating back to 1929, adopted during the British mandate, constitutes the legal framework for setting up businesses in Gaza.

Customs legislation in the West Bank and Gaza is derived from Jordanian or Israeli laws and Israeli military ordinances. The 1994 economic protocol of Paris governs economic and trade relations between the Palestinian Authority and Israel. Most customs procedures and Palestinian tariff measures are based on Israeli standards and are pretty much controlled by Israel.

However, on the basis of the economic Protocol of Paris, certain products are regulated by the Palestinian Authority, which can reduce or increase customs duty rates. Other products are governed by the Palestinian Authority but are subject to quantitative restrictions or Israeli standards. There are multiple incentives:

PIPA offers exemption from customs duty for a given period. This also applies to spare parts, fixed assets for developing or enlarging an already existing company, and price increases due to higher costs because of price hikes in the exporting country or increases in shipping or processing costs. Investment initiatives approved by PIPA benefit from exemptions and tax cuts according to volume. The corporate tax rate is 20 percent and VAT is at 17 percent.

For investment between US$ 100,000 and US$ 1 million: tax exemption for five years and taxation at a 10 percent rate for the following eight years.

Investment between US$ 1 and US$ 5 million: tax exemption for five years and taxation at a 10 percent rate for the following 12 years.

Investment of more than US$ 5 million: tax exemption for five years and taxation at a rate of 10 percent for the following 16 years.

Projects recommended by PIPA and approved by the Council of Ministers are exempt from tax for five years and taxable at a 10 percent rate for the following 20 years. ‐Exemptions or special incentives are granted to investment in hospitals, hotels or enterprises engaged in export activities.

Investment in training in the ICT sector can be deducted from the tax base.

Finance & banking in Palestine There are currently 21 banks, including 10 Palestinian banks with total assets of US$ 1.355 billion and 12 foreign banks (9 Jordanian, 2 Egyptian and HSBC Middle East) with total assets of US$ 4.128 billion.

The Palestinian monetary authority LDC monitors banking operations and conformity to prudential practices. Certain banks have been rated AA by the Thompson rating agency.

Banks in Palestine are equipped with the most modern technologies to serve their customers, in particular:

Data processing systems;

Automatic teller machines (ATM) throughout the territory;

Banking operations by telephone;

Banking operations online via internet.

In the absence of a Palestinian national currency, banks operate primarily with the Israeli shekel, the Jordanian Dinar and the US dollar.

The Palestinian stock exchange ‐ the Palestine Securities Exchange (PSE) ‐ began trading in February 1997. The PSE is a member of the federation of Euro‐Asian Stock Markets, of the Arab Federation of Stock Markets, and of the Arab Monetary Fund as well as the international federation of stock markets.

The Capital Market Authority (CMA) has been in charge of supervising the PSE since August 2005. Currently, 28 companies are listed on the stock market and 40 others will be posted shortly. These companies work in various sectors, from pharmaceutical production to telecommunications, banks and insurance or tourism. The Alquds index (base 100 in 1997) is based on average market capitalisation of the 10 largest listed companies. Starting at 139.13 points in 1997, it reached 1128.59 points in 2005 (306.61 percent growth) and market capitalisation came to US$ 4,456 billion in 2005 (+306.39 percent).

Telecommunications & internet in Palestine Under the terms of article 36 of the Oslo II agreements, the Palestinian Authority is authorised to establish and operate an independent telecommunications system, whereas the former system of connection depended almost entirely on Israeli infrastructure, the Ministry of Telecommunications and Information Technology (MoTIT).

In 1996, the Palestinian Authority granted the national operator Paltel (Palestine Telecommunications Company) a 20‐year licence for the fixed telephony network, renewable for a further 20 years.

Paltel has held a monopoly for the first 10 years of this concession. Furthermore, a five‐year licence constituting a monopoly for this period was granted to Paltel for exploitation of a mobile telephony network. Paltel’s monopoly was legally abolished in 2001, so the cellular telephony sector is now open to new operators. In September 2000, Paltel created a subsidiary company Palcell called Jawwal (the “itinerant”) to manage this network, in which it holds a 100 percent of the capital since 2004. The company has invested US$ 140 million to establish a cellular network covering the West Bank and the Gaza Strip.

Plans for expansion of the network are envisaged in four phases, including more than 350 “cells” serving more than 500,000 customers. Jawwal has completed phase 3 and is preparing to increase the number of transmission stations in order to serve 420,000 customers. The network’s backbone will also be reinforced, using GPRS data transmission technology.

According to a recent study by the Madar Research Centre, the Palestinian Territories are at the top of the list of the six countries of the Near East (Egypt, Iraq, Jordan, Lebanon, Syria and the Palestinian territories) in terms of investment in information and communication technologies as a share of GDP, posting 4.04 percent, a little higher than the world average.

The Paltel group is also expanding on international markets. It has just created a company, TEL V, with its head office in the United Arab Emirates. It will manage the group’s investments and those of its partners on regional and international markets. This new company will initially subscribe capital of US$ 300 million. It should be noted that the Palestinian operator of telecommunications Paltel previously set up business in the Emirates with capital of US$ 7 million to work in the field of fixed telephony and the internet.

In September 2005, the Minister of Telecommunications announced the end of Jawwal’s monopoly. One year later, in September 2006, Palestine’s second mobile licence was awarded to Kuwait’s Watanyia Telecom holding, which, in partnership with the Palestinian Investment Fund, will run a new operator to be operational in 2007/2008 (see Success Story)..

Business and investment opportunities in Palestine In the current context of social, economic and political difficulties, major investment will be needed to continue the rehabilitation initiatives launched ten years ago and to develop modernisation of the country’s infrastructure and rebuilding. Effective infrastructure will provide a sustainable economic development, a fundamental cornerstone in the establishment of a viable Palestinian State in the near future.

According to the World Bank, investment needs are evaluated between US$ 500 and US$ 900 million for the short‐term (2005‐2008), depending on how the political situation evolves.

The withdrawal of Israel from the Gaza Strip in 2005 offers many opportunities for the development and rebuilding of Gaza. The EU decided at the end of 2005 to release EUR 60 million to finance the setting up of political institutions and the construction of strategic infrastructure henceforth controlled by the Palestinian Authority. The main opportunities are:

Rehabilitation and construction of infrastructure: urban development, roads, the Jenine‐Hebron highway, water purification and distribution facilities, energy production and distribution (electricity, gas), which will have major economic impact;

Construction work for the development of tourism (tapping the country’s extraordinary and unique cultural heritage) and construction of housing to keep up with high demographic growth;

Modern retailing (shopping centres), in a country with a long tradition of commerce;

ICT to support sectoral growth;

Machinery and equipment for the development of Palestinian industry;

The development of agriculture and agrofood (fruits and cut flowers).

In addition, a medium‐term economic development plan (MTDP) covering the period 2005‐2007 has been launched by the Ministry of Planning (MoP) as the framework for the development process and the guide for the relationship between PNA institutions and the donor countries and organisations.

Energy

Palestine’s energy sector started developing under the Palestinian Energy Authority (PEA) in 1995, later becoming the Palestinian Energy and Natural Resources Authority (Penra). In the field of energy generation, more than 30 percent of electricity consumption is now produced in the Palestinian Territories, compared to only 3 percent prior to 1995. Despite this progress, the situation remains difficult: electricity consumption (2 to 2.5 million MWH) is still largely dependent on Israeli sources and levels (about 70 percent).

Approximately 13 percent of the population is not connected to the network, particularly in rural communities (where 4.5 percent are without electricity and 8.5 percent are supplied by small power generating units). The Ministry of Energy and Natural Resources expects that the demand for electricity in the West Bank and the

Gaza Strip will increase fourfold in the next 15 years. In order to increase domestic output and to reduce dependency on Israel, Penra is encouraging the private sector to invest in the construction of new power stations, e.g. the 140 MW Gaza combined cycle power plant, carried out under a BOO arrangement for total investment of US$ 150 million and managed by the ʹʹPalestine Electricity Companyʹʹ (PEC) consortium.

In addition, Penra and NEC (National Electricity Company) have signed an agreement for the construction of a 200 MW power station in Kalkilya, which will serve the northern areas of the West Bank, later to be inter‐connected to Jordan’s grid. Penra is considering construction of a 220 KV electrical grid system to connect Gaza’s power plant to transformation stations north and south of Gaza; connection of the Gaza and West Bank networks using 220 KV cables; and construction of a 220 KV grid system to connect the districts of the West Bank. Penra is considering creation of a public company, the Palestine Energy Transmission Co. Ltd (PETL), to manage, maintain, and develop a national transport system. It will buy the electricity produced by private companies and sell it at the regional level.

As for gas resources, there are major natural gas layers in Gaza that have remained unexploited because of the Israeli Veto, which controls territorial waters. Two offshore gas fields have been identified, with reserves estimated at 46 billion m3. The first field, in Palestinian territorial waters, potentially offering 30 years of commercial exploitation, has been awarded to a consortium of British Gas (90 percent) and the CCC Group. A second field located further to the north (67 percent in Palestinian territorial waters and 33 percent in Israeli territorial waters) is being explored by British Gas.

A strategic field for the Palestinian Territories, controlled mainly by Israel, the water sector has vital political, economic and social implications, both locally and at the regional level. Thanks to mobilisation of the international community, infrastructure for distribution, purification and treatment is improving, but needs remain considerable. From 1995 to 2006, international investment in the sector reached US$ 620 million, according to the PAMS database (Palestine Assistance Monitoring System) on aid coordination managed by the Ministry of Planning. Palestinians want an autonomous distribution network, with a view to avoiding Israeli restrictions and constraints. They need to increase the quantity of water for consumption by reducing losses in the network and investing in purification and water treatment in order to preserve groundwater quality.

The PA has privatised water services in the framework of delegated management contracts with the financial assistance of the World Bank. The French companies Vivendi and Lyonnaise des Eaux have been awarded the first two tenders launched by the World Bank for management of water services in the Gaza Strip and southern areas of the West Bank. However, Vivendi decided to withdraw at the beginning of 2003 because of difficult working conditions in and around Bethlehem. For Gaza, a new tender will be launched shortly. Six international companies have been short listed: Suez Environment (France), MVV (Consultants and Sanitary Engineers (Germany), Saudi Consulting Services (Saudi Arabia), OMI Inc. (US), Amiantit, Infranan and HydroComp Enterprises (Austria), and Hydroplan (Germany).

Information technologies

Information technology is the fastest growing sector in the Palestinian economy. A large pool of well‐educated work force and Palestineʹs geographic proximity to advanced technology centres in

Israel are two factors that have greatly contributed to the sectorʹs expansion.

Palestinian universities are capitalising on the worldwide shortage of IT specialists by putting strong emphasis on IT training in their curricula. Sun Microsystems, for example, has donated laboratories to three Palestinian universities in order to train IT students and a number of universities in Palestine have established Information Technology Units. It is expected that this specialised curriculum will be of critical importance to the emerging Palestinian state, providing graduates well versed to meet the special needs of ministries, municipalities, telecommunications companies, as well as banking and financial structures.

A commitment to international quality standards (such as CMM and ISO) and supportive international trade agreements are key reasons why leading names such as IDS, Oracle, 3Com and Timex have chosen to establish offices, R&D operations or links in Palestine.

Development of the construction sector is a priority for the Palestinian Authority to meet the needs of a population growing at a rate of 3.3 percent. Housing construction is developing very quickly thanks to the return of investors from the Palestinian Diaspora. The PA is also offering public land to the population, in a move to encourage construction. The Palestinian Territories count 3.7 million inhabitants and the population is largely urban. Population density is one of the highest in the world, particularly in Gaza (3800 inhabitants/km²), where housing needs are the most critical. Most of the population lives in refugee camps, where the majority of buildings remain unfinished. Current forecasts show that some 200,000 new homes will need to be built by 2010, with the Ministry of Housing evaluating needs at 40,000 units in the Gaza Strip.

Building materials are imported from nearby countries, Israel in particular. The construction sector accounts for 17 percent of GNP and employs 11.5 percent of the Palestinian labour force, with nearly 21,000 employees on record. The Palestinian Real Estate Investment Company is implementing a vast real estate project in the northern part of the Gaza Strip. Two categories of housing have been built, one for the middle class (2700 residences, 700 shops, a hotel, a police station), the other for low‐income segments of the population (800 units).

Construction of the first phase of the residential city of Sheik Zayed at Bet Lahya in northern Gaza has been completed. The total cost of this phase, which includes 750 apartments, came to US$ 50 million. The overall project will include 3700 apartments and related infrastructure at a cost of approximately US$ 250 million, to be financed by a grant from the President of the United Arab Emirates, with the Palestinian Authority providing the land. Following evacuation of the Gaza Strip by the Israeli army in August 2005, Mahmoud Abbas, President of the Palestinian Authority, announced construction of a city to be named “Sheik Khalifa Ben Zayed” on the ruins of the “Morague”colony. The city is mean to have 3000 apartments at a cost of US$ 100 million, in addition to Emirate funding of 638 flats in Rafah and Saudi funding of another 1210 flats, also in Rafah.

The road network is made up of 2495 km of roads, including 2200 km in the West Bank and 295 km in the Gaza Strip, and an additional 1300 km known as “detour roads” to Israeli settlements, where access is limited to Israelis. The Palestinian road network is inadequate and this constitutes a major handicap for the Territories, which suffer from isolation and inability to trade with neighbouring countries. Planning of a road network in the PT is subject to preconditions. In effect, the Territories are divided into three zones (A, B and C), each with a different level of autonomy,

so any roadwork requires coordination between Palestinian and Israeli authorities, which is not an easy proposition.

Four entities are present on the health market: the public services of the Palestinian Authority managed by the Ministry of Health (MOH), the United Nations Relief and Works Agency for Palestine (UNRWA), Palestinian or foreign non‐governmental organisations (NGOs), and the Palestinian private sector.

The Ministry of Health is responsible for the supervision, regulation and licensing of all Palestinian medical services. In spite of considerable international assistance, health needs remain considerable. In a study undertaken by the PCBS and published in its 2004 Annual Report, total health expenditure in the Palestinian Territories amounted to US$ 503 million in 2003.

According to the Palestinian Assistance Monitoring System (PAMS) database at the Ministry of Planning, international assistance in the health sector amounted to US$ 250,161 million, including US$ 166.253 million disbursed from 1994 to 2005. This assistance has contributed to construction of infrastructure such as new hospital complexes (the European Khan Younis Hospital in Gaza, the Radiotherapy Centre of Gaza) and private basic health care clinics, the supply of high‐technology medical equipment or pharmaceutical products as well as medical transport equipment (ambulances…).

According to the 2004 Annual Report, 93 health projects were carried out between 2000 and 2004 or are currently under way, at a total cost of US$ 235.92 million: 66 projects already completed for US$ 124.87 million and 27 ongoing projects for US$ 111.05 million. 55 involve hospitals, with 27 operational in 2004. 27 projects (nine still under way) relate to private basic health care linked to the

primary education system. 11 others (five still under way) relate to other medical services.

Palestine’s pharmaceutical industry is unique in terms of innovation and development. The industry began to develop after the events of 1967, which resulted in closed borders with the rest of the Arab world. Nine pharmacists in the West Bank established small laboratories to manufacture simple syrups for local consumption. Twenty‐five years later, annual sales of the six largest manufacturers in the West Bank amounted to US$ 25 million, contributing to US$ 65 million in annual sales, with Israeli and foreign manufacturers covering the balance of US$ 40 million. Palestinian pharmaceutical companies have expanded capacity and product lines at a rate of 7‐10 percent per annum over the last 25 years. Product lines concentrate on meeting the needs of the Palestinian market. There are currently six major Palestinian companies representing some US$ 45 million in capital investment.

Production at these companies currently ranges between 1.5 and 8 million units a year, with nearly 400 kinds of generic products. Local production is not high enough to meet market needs and the PT must import a significant portion of its pharmaceutical goods. The main suppliers are Israel (75 percent of total imports), Switzerland, France, Great Britain, Germany, the United States, Jordan, and Egypt.

The remaining companies operate in the Gaza Strip. Key competitive factors include the introduction of automated production lines, improved management and production processes. Ongoing training and quality control practices have led to significant increases in local production and standards.

The textile and clothing industry is the second largest industrial employer in Palestine. The industry is made up of hundreds of

small enterprises working out of private homes. Seventy percent of registered companies are considered individual proprietorships, the remaining 30 percent partnerships. The highest concentration of garment and textile factories in the West Bank is in Nablus, where there are 362 factories. Gaza is home to 760 factories and the remaining 578 are distributed throughout West Bank towns and cities. The industry is made up predominately of micro‐establishments with between one and four employees. Only 1 percent of companies in the sector employs over 50 workers. The remaining 49 percent of garment and textile factories in the West Bank and Gaza employ between 5 and 49 employees. An increasing number of Palestinian companies export directly to the US, Europe and Arab countries, while a significant 80 percent of production goes to Israel, to be exported to international markets under Israeli brand names.

Inputs for the industry, ranging from fabric to trimmings and accessories, have potential for development. Developed countries are the prime clients for high‐end apparel, with Europe, the US and Japan together currently accounting for 85 percent of overall world imports. Free trade agreements between Palestine and the US and Europe provide favourable terms for export and investment.

Stone and marble

The stone and marble sector contributes 4 percent to Palestine’s GNP and 5 percent to its GDP. Average annual sales per employee come to approximately US$ 40,000, fivefold average productivity per employee for overall industrial activity in Palestine.

Sales grew significantly in 2005, reaching US$ 270 million in 2005 vs. US$ 220 million in 2004. In 2005, 32 percent went to the domestic market, 55 percent was exported to Israel, and 13 percent was shipped throughout the Middle East region, a promising market with a fast growing potential (10 percent in 2004).

The sector accounts for 25 percent of overall Palestinian industrial production and represents 4.5 percent of GDP, providing 15,000 direct jobs as well as several thousand more jobs in related industries. Production of stone rose to 14.5 million m3 in 2005, up from 12 million m3 in 2004. The technology used in this sector is mostly semi‐automatic (85 percent), with some automatic equipment (15 percent). Ninety five percent of raw materials come from local sources. With sales turnover of US$ 200 million in 2004, the stone industry plays a predominant role in the Palestinian economy.

Overall, Palestinian stone has high export potential, easily competing with the marble currently traded on world markets and available in a wide range of colours and other specifications. The Palestinian Territories occupy 12th place worldwide in this sector, accounting for 1.8 percent of world production.

Tourism

Palestine provides the tourist not only with an opportunity to discover its many religious and historical monuments, but also its unique geography and short moderate winters in which to enjoy their holidays. Palestine also has coastal areas and scenic mountainous landscapes, in addition to the historic city of Jericho and the Dead Sea. There are several health resorts and recreational facilities in the Jericho/Dead Sea area. A state‐of‐the‐art casino was opened in late 1998 on the outskirts of Jericho and shortly thereafter, a five‐star international hotel was built as an extension to the Oasis Casino project. Major Palestinian investors are poised to launch a world‐class theme park when political stability returns. Cultural heritage, entertainment and recreational opportunities, and conference facilities are all available in Palestine for local, regional, and international tourists and businesspersons. It is estimated that nearly one million tourists visited Palestine in 2000, generating approximately US$ 450 million in revenue. Tourism’s

contribution to Palestine’s national economy is greater than that of industry or agriculture.

The hotel industry is the backbone of Palestine’s tourism sector in terms of income, investment and employment. Hotels provide 25 percent of overall revenue from tourism and generate 46 percent of total tourism‐oriented employment. Substantial development of the hotel industry has been accompanied by a perceptible increase in the quality of services. The entry of international names such as the Intercontinental chain on the Palestinian hotel scene has contributed to enhanced growth prospects for the industry. Other sub‐sectors range from tour guides and tour operator services to transportation companies and handicrafts, in addition to souvenir shops and eating establishments.

Palestine has traditionally enjoyed a strong reputation for trade in agriculture, which plays a major role in food security and jobs. It is also the basis for activities in agrofood, production of fodder, soaps, furniture, cosmetics, leather goods…

Agriculture employs 16 percent of the Palestinian labour force and provides activity for more than 39 percent of the informal sector. Moreover, more than 17 percent of Palestinian families practice subsistence farming and livestock activities. The agricultural sector generates 25 percent of Palestinian exports, mainly fruits (72 percent of cultivated land), olives and olive oil, strawberries, vegetables and (more recently) cut flowers.

The food and beverage sector has been one of the fastest growing branches of the Palestinian economy. The Investment Encouragement Law eased restrictions on new businesses in 1998 and, as a result, the sector has become a major pole for investment. Manufacturing plants in this sub‐sector are well equipped and

most are semi or fully automated. A large percentage of existing food and beverage manufacturing plants are ISO‐certified.

Market share for Palestinian‐processed food products has increased dramatically over the past few years. It stood at 25 percent in 1996, but by 2001, it had increased to 50 percent. This was due in part to proactive public policies to encourage local investment as well as an aggressive marketing campaign to promote Palestinian‐manufactured food and beverages. Like other manufacturing industries, this branch depends heavily on a vibrant local market. 87.7 percent of domestic sales are concentrated in the West Bank, the remainder in Gaza. 89 percent of exported products are sold in Israel, the rest in the Middle East and Europe.

Reconstruction opportunities in the Gaza Strip

The Israeli withdrawal from Gaza in 2005 has created new development prospects in the area outlined by the “Gaza Strip Economic Development Strategy” covering the 2005‐2015 period. The objectives of this plan are as follows:

to create a healthy vital space for a young, rapidly growing population, by regulating and rationalising land use and urban development;

to preserve and protect scarce and already vulnerable natural resources and to ensure their optimal, durable use;

to preserve cultural heritage and protect historic and cultural sites;

to harmonise regional development priorities with the national Medium Term Development Plan;

to create a favourable physical environment and the infrastructure required for a return to economic growth, while focusing on poverty alleviation and unemployment;

to rehabilitate and rebuild homes, damaged infrastructure, manufacturing/commercial units, and farms;

to create a modern and effective transport network for people and goods between the Gaza Strip, the West Bank and the outside world;

to reinstate communities on the grounds of evacuated “settlements” and related infrastructure;

to set up a legal framework for future investment;

to work for setting up of an independent Palestinian State that includes the West Bank and the Gaza Strip.

The Plan gives special attention to the areas evacuated starting on 15 August 2005, which represent approximately 16.5 percent of the total surface of the Gaza Strip. 97 percent of the land occupied by these settlements is public land with major but fragile ground water reserves that urgently require measures for their protection and safeguarding and a rational basis for resource allocation

The Plan outlines general directives for the rehabilitation of these areas in the context of Palestine’s overall urban fabric and defines options for future use in line with medium and long‐term needs and priorities for the development of Palestine and optimal use of existing equipment and infrastructure. The Economic Development Matrix includes:

Emergency Rehabilitation of evacuated areas and surrounding; Rehabilitation of destroyed industrial and commercial

establishments; Repair and replacement.

Infrastructure Natural gas carrier line project; Municipal, national and border industrial zones;

Construction of a central wastewater treatment plant in middle area and Gaza.

Access to market Safe passage; Establishing Gaza harbour; Modernisation programme & upgrading of industrial firms Good governance (enabling environment) E‐government project; Industrial and information technology incubators and parks; Development and establishment of vocational training centres.

Access to finance Study and establish a credit insurance fund; Reportage facility for refinance of private sector bad debt.

Access to technology and know how Development of R&D centres at national universities; Joint international MBA programme with national universities; Solid waste recycling project.

More information is available on:

http://www.mne.gov.ps/pdf/gazaa.pdf

The Arab Fund for Economic and Social Development (AFESD) has already approved US$ 5.5 million for the construction of an industrial park in Gaza devoted to the handicrafts industry. This financing will cover infrastructure and warehouses, where workshops will be located. The Ministry will offer investment loans at preferential rates for the purchase of equipment and materials. The area will include 200 to 250 workshops and create some 2,000 jobs directly, as well as indirect employment.

Success story: Watanyia Telecom believes in the power of communication In spite of a rather troubled business environment, foreign companies still bet on a brighter Palestinian future. The example of Wataniya Telecom’s involvement in setting up a second national mobile operator is there to prove it. In September 2006, the Kuwaiti telecom holding made a successful USD 356.7 million offer as an upfront licence payment to install and operate new 2G/3G mobile telecommunications system and services. Together with its local partner, the Palestinian Investment Fund (PIF), it had since then been negotiating with the Ministry of Telecommunications and Information Technology in Palestine (MTIT) to finalise the detailed terms of the license. A final agreement was signed on March 15, 2007.

The partners established a new local company called Wataniya Palestine Mobile Telecommunications Company, whose leadership will be logically let to Wataniya. Under the shareholder agreement, Wataniya International, which has meanwhile changed hands in March 2007 to become a subsidiary of Qatar Telecom, will eventually own 40% of its capital. The PIF will hold 30%, while the remaining 30% will be offered to the Palestinian public through an IPO. The commercial launching is expected in the coming months.

Faisal Al Ayyar, Chairman of Wataniya International, believes that his company can be “a significant contributor to the building of a strong and independent Palestinian economy, fuelling Palestinian economic growth through direct foreign investment, contributing to the advancement of the information and communication technology sector in Palestine, investing in the build‐up and retention of human capital and by delivering direct and indirect employment opportunities”.

Overview

References

Capital City Damascus Surface area 185,180 km² Population 19 million inhabitants Language Arabic, Circassian, Armenian, Aramaic PIB (dollars) US$ 26 bn (2005) GNP/per capita (dollars)

US$ 1,418 – 3,847 in ppp. (2005)

Religion Muslims (90%), Christians (10%) National Day 17 April (date of France departure in 1946) Currency (March 2007)

Syrian Pound (SYP) 1 EUR = 72.76 SYP – 1 US$ = 54.45SYP

Signed on19/10/2004; still being ratified. EU web site: http://www.delsyr.cec.eu.int/

WTO membership Negotiations in progress Sources: IMF, WDI 2006 and Consultations Article IV 2005, Country Report 05/355, October 2005

Economic profile

Located at the crossroads of Europe, Asia and Africa, the Syrian Arab Republic is bordered by Lebanon to the west, Israel and Jordan to the south, Iraq to the east and Turkey to the north.

Syria has opened up to the outside world only very recently, when Bachar El Assad became President in 2000. The previous period (1960‐2000) was marked by a socialist, nationalised economy, with very directive production aimed at self‐sufficiency. Since 2000, and especially since 2003, a number of major reforms, particularly in the

Invest in Syria

financial sector, have led to an improved economic environment and growth is on the rise, up from 1.3 percent in 2002 to 3.8 percent in 2005 (the latest estimates mention a growth rate close to 2.9%). GDP came to US$ 26.2 billion in 2005, compared to US$ 20.3 billion in 2002.

Syria has adopted a prudent policy in the area of economic and administrative reforms, targeting a more conducive economic environment based on private sector involvement but with due attention to social balance. The State has started to modernise the country’s banking structure, revise the foreign exchange system, privatise a number of public companies, improve the business climate, and simplify customs formalities. Certain State monopolies will be opened to competition, notably in metallurgy, textiles, and dairy products. Special attention is also given to education and training.

Agriculture weighs heavily in the economy. Depending on the sources, it is said to employ directly 30% of the labour force, to amount up to 30% of GDP, while 20% more of the labour force depend on it indirectly (Oxford Business Group). The government wants to modernise the sector, in particular by installing irrigation systems and improving water usage, which has been beneficial for cotton, the country’s second largest export. According to the World Bank (WDI 2005 figures), industry accounts for 35% of GDP (up from 31% in 2001) and involves mainly extractive industries.

Syria is the 29th world producer of oil, turning out 26 million tons. Oil accounts for 60 percent of export earnings (US$ 3.8 billion) and provides half of state revenues. However, oil reserves are likely to be depleted within 10 years.

Natural gas is the object of considerable efforts by the authorities to substitute it for oil. Gas production is on the rise, thanks in particular to the pipeline connecting the port of

Banias to Jordan and the gas initiative at Deir Ez Zor (managed by Total and Conoco).

Phosphate reserves are estimated at more than 1 billion tons and nearly 75 percent of production is exported.

Manufacturing industries contribute less than 6 percent to GDP, mostly involving textiles (30 percent of manufacturing output and 15 percent of exports), agrofood and construction.

The government has also launched a strategy to develop tourism, a sector in which Syria has considerable potential thanks to its nature and historical sites and cultural heritage. Hotel capacity is slated to rise from the current level of 36,000 beds to more than 170,000 beds by 2020, an increase of 8000 new beds a year, generating some 10,000 jobs annually. Tourist entries have increased considerably, up from 700,000 in 1990 to 3.1 million in 2005 (US$ 1.4 billion in revenue, 6.5 percent of GDP) but the sector is currently suffering from the conflict in Iraq. Privatisation is not yet on the agenda, but the government is starting to turn to outsourced management contracts and concessions.

Foreign direct investments reached US$ 700 million in 2005 while domestic investments reached US$ 6.3 billion (compared to US$ 3.7 billion in 2004). Syria signed a draft association agreement with the European Union in October 2004, but it is not yet ratified. For the moment, all trade provisions in the agreement will be applied on a purely provisional basis until it enters into force.

The 2004 trade balance registered a deficit of US$ 1.2 billion, compared to a surplus of US$ 600 million in 2003. This deterioration was due primarily to declining exports, in particular oil exports (‐8 percent), and the rise in imports (+29 percent). Italy, France, and Iraq are Syria’s main customers, the destination for its exports of oil, textile products, cotton, and foodstuffs. The country’s first three suppliers are the Ukraine, China, and Russia and its

Invest in Syria

main imports are capital equipment, consumer products, and vehicles.

Economic policy is outlined in five‐year development plans. The just‐published 10th Economic and Social Development Plan covers the period 2006‐2010, setting objectives, and the framework for a social market economy. The main priority of this plan is progressive state disengagement in order to stimulate competitiveness and competition while maintaining social balance. Syria’s economy will need 1.800 billion Syrian pounds (US$ 34 billion) in investments over the next five years to reach GDP growth of 7 percent in 2010. The main objectives of the plan are as follows:

The opening of public economic sectors to private investment;

Equal distribution of growth throughout the 14 governorships and development of the Syrian desert and regions to the east;

The upgrading of social structures and living standards and anti‐corruption measures.

Country risk

EIU provided the following estimate of the main country risks as of March 2007 (AAA=least risky, D=most risky):

Sovereign risk (CCC, stable): pros: low debt level, resources (oil) and liquidity; cons: poor repayment record; declining oil production, risk of international sanctions;

Currency risk (B, negative): pros: relative stability of the currency; cons: reliance on oil earnings political risk, limited convertibility;

Banking sector risk (CCC, stable): cons: poor quality of mainly publicly‐owned assets, need for reforms.

Political risk (CC): pros: on power is unlikely to be broken; cons: regime’s isolation

Economic structure risk (B): cons: heavy export dependence on oil.

Challenges

Syria is in the heart of a turbulent region: it shares borders with Turkey in the north, Iraq in the west, Jordan and Israel in south, and with Lebanon in the west.

The economy – for a long time under State control – is heavily dependent on the oil market.

Unemployment, which affects 25% of the population, mainly the youth, is another problem and the current growth does not make it possible to slow down this upward trend.

Strong points

Numerous efforts have been made to attract foreign investors. ‘’Investment Law n°10’’, enacted in 1991, provides a significant contribution in that direction. By way of example, companies are exempted of profit taxes for seven years; another measure concerns the importation of machinery, equipment and vehicles which is tax free as well. Under a decree dated 2000, capitals can be repatriated.

It should also be pointed out that Syria opens up to neighbouring countries. Agreements have been signed with Jordan, Saudi Arabia, Iraq, Egypt… There is a free trade zone project in the region in 2005.

Syria has many assets: a deep‐rooted trading culture, its geographical position, and its tourist potential.

Invest in Syria

A Syrian Investment Promotion Agency to be set up soon New measures passed at the end of 2006/ beginning of 2007 called for the creation of an investment authority to operate under the prime ministerʹs office. This new administrative body should be launched in 2007. Meanwhile, an Investment Bureau will continue to act as the main front office for facilitating FDI projects.

It is worth mentioning that the Syrian Investment Bureau introduced a “one‐stop‐shop” service that facilitates the administrative procedures for setting up a company. The only formal condition to benefit from this service is for a company to have a minimal capital of US$ 200,000.

How to invest in Syria After thirty years (1960‐1991) of strong restrictions on private investment (both national and foreign), followed by fifteen years of relative opening (1991‐2006), the Syrian authorities promulgated at the end of 2006 a new investment law which:

Authorises the investors to repatriate the benefits on the capital introduced into the country via Syrian banks;

Provides for an exemption of the customs taxes on the means of production, including the means of transport (however, the former tax exemptions will now be part of the annual fiscal law; depending on sectors and areas, companies could be taxed at 14% of their benefits, vs. 28% in the ordinary regime);

Considers the creation of an investment promotion organisation in Syria.

This new law and its application decrees n°8 and 9 (dated January 26, 2007) are replacing and complementing the Law n°10 of 1991, symbol of shy country opening conceded by President Hafez Al

Assad in the 90s. It is accompanied by a series of new provisions: new customs code, law creating an open Damascus Stock Exchange on November 1, 2006, public‐private partnerships and multiplication of private investment opportunities, starting with the bank and insurance sectors.

It is too early to explain all the details of the new regulations. The law n°10 of 1991 already made investment in Syria more attractive by offering some tax holidays, loosening restrictions on hard currency, reducing income taxes for share‐holding companies, and incorporating additional sectorial and regional incentives. This law and its amendments provided for foreign ownership without limits or control in numerous sectors.

The terms of this law applied to economic and social development projects in the following fields: agriculture and agro‐industry, private and joint (public‐private) industrial projects, initiatives in the field of transport, and any other undertakings authorised by the Council within the limits of the law. Profits remain tax‐free for five years and companies that export over 50 percent of their production enjoy a seven‐year tax holiday. Capital goods and transport equipment needed for the project are exempt from customs duty. The law was amended by decree 7, which grants foreign investors the right to own the land where their business is located.

Almost all sectors of the economy are open to foreign direct investment, except for power generation and distribution, air transport, port operations, bottling of water, telephony, and oil and gas production and refining. Power generation and cement factories were recently opened to private investors.

All legal forms of companies, from limited liability to holdings, are authorised. In matters of trade, Syrian authorities have over the past few years started to gradually open up the country, in

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particular by signing a number of free trade agreements with its neighbours.

The Arab free trade zone (GAFTA), in force since 2005, will give investors based in Syria tariff and customs free access to more than 14 other Arab countries. The pending EU association agreement will provide similar access to the EU market.

A “negative” list of prohibited imports is gradually replacing compulsory export and import licenses. The exclusive right of commissioned agents to manage imports has come to an end. Customs duty on imported raw materials has been reduced and the harmonised NHS system introduced. Investors can open foreign currency accounts at the Commercial Bank of Syria. Decree 7 allows exporters to retain 100 percent of income from exports.

Investors targeting export markets can set up operations in any of the country’s seven free trade zones. There are free zones near the border town of Darʹa, in Adra (north of Damascus), Aleppo, Damascus, and at Damascus International Airport. There are also free zones at the ports of Latakia and Tartus.

The government provides the following benefits to companies operating in free zones: no import licensing requirement for inputs and goods entering these zones, imports cleared with only a manifest as documentation and for inspection purposes; all goods entering and stored in the zones exempt from local taxes and duty; free foreign exchange transactions; any commodity eligible for import into Syria can be acquired from free zone manufacturing facilities, but an import permit is required; and access to private banks operating in free zone areas.

Regarding taxation, the tax on corporate profits is applied at progressive rates ranging from 10 percent to 45 percent, depending on the amount of taxable income. Shareholding companies and industrial limited liability companies are taxed at a flat rate of 32

percent and 42 percent respectively. Foreign branches are taxed as well as resident companies.

All imported hard currency must be deposited in an account at the Commercial Bank of Syria, along with 75 percent of income from exports. Restrictions on the repatriation of capital have been eased in the framework of law n°10 and foreign investors can freely repatriate their profits annually. Outward capital transfers and profit remittances are currently prohibited, unless approved by the Prime Minister or sanctioned under law 10 or a special arrangement, as is the case for production sharing agreements signed with oil exploration companies.

Under decree 7, the actual value of the project can be repatriated five years after completion of the project (six months, if the project fails due to events beyond the control of the investor). Expatriate employees are allowed to transfer abroad 50 percent of their salary and 100 percent of severance pay. For foreign oil companies, ʺcost recoveryʺ for exploration and development expenditure is governed by formulas specifically negotiated in the applicable concession agreement.

Finance & banking in Syria Reform of the banking environment was launched by promulgation of legislation, new law n°23 of 2002, which redefines the role and statute of the Central Bank and creates the Monetary and Credit Council (CMC), in charge of monetary policy and private banking activity. Law n°28 of April 2001 outlines reform of the banking environment and allows for private banking.

Key provisions of the private banking law include: wholly private or joint public‐private ownership of private banks; minimum 51 percent Syrian ownership of private banks; minimum capital of SYP1.5 billion (approx. US$ 30 million) for private banks; 10 percent of a private bank’s subscribed capital to be deposited at the

Invest in Syria

Central Bank as reserves. There is a 25 percent income tax on net profits for all banking operations and private banks are banned from engaging in commercial, industrial, and service activities unrelated to banking.

Other recent measures such as authorisation to open a bank account in foreign currency, the possibility of transferring foreign currency, and falling interest rates on the money market reflect Syria’s commitment to adopting forward‐looking monetary and financial policy.

Syriaʹs government‐controlled banking system is made up of the Central Bank of Syria and five specialised banks: the Commercial Bank of Syria, the Agricultural Cooperative Bank, the Industrial Bank, the Real Estate Bank, and the Peopleʹs Credit Bank. The Commercial Bank had a monopoly on international transactions until 2004, holding foreign exchange deposits outside Syria and providing commercial banking services (including letters of credit), while other banks were more or less limited to savings and checking accounts and lending for non‐commercial purposes.

New private banks entered the market since 2004, in particular the subsidiaries of banks in neighbouring countries, which had already been working with the Syrian private sector:

The BEMO‐Saudi‐Fransi bank is a joint‐venture between Banque Européenne pour le Moyen‐Orient (BEMO) of Lebanon and Banque Saudi Fransi, an affiliate of Franceʹs Crédit Agricole‐ Banque de Syrie et dʹOutre Mer (BSOM), whose main shareholder will be Lebanonʹs Banque du Liban et dʹOutre Mer (BLOM) in partnership with the International Finance Corporation.

Bank Audi whose leading shareholder are the Lebanese Bank Audi, Audi Saradar Investment Bank and Lebanon Invest, Sheikh Abdallah El Rahji;

The Arab Bank Syria with 49 percent shares by the Arab Bank which takes Jordan as a headquarters;

Bank Byblos Syria: the Lebanese Byblos and the OPEC fund for international development;

Fransabank (Lebanese), due to begin operations in 2006.

Furthermore, a 2005 decree authorises Islamic banks to operate in the market, as long as they have minimum capital of 5 billion SYP (US$ 100 million) instead of 1.5 billion SYP for other banks. Three Islamic banks should be starting up operations by the end of 2006: Al Shall (Kuwait), Dallah Al Baraka (Saudi) and Qatar International Islamic Bank.

The opening of the financial sector has improved confidence of economic operators and stimulated competition between banks. Private banks have attracted many new customers and considerable deposits; and public banks, in particular the Trade Bank of Syria started modernising and launching new services to develop electronic transactions (VISA, an electronic payment network, e‐banking…).

Prospects for the sector are promising. After only two years of activity, performance at private banks has exceeded projections, with deposits of 100 billion SYP (US$ 2 billion).

A stock exchange commission was set up at the beginning of 2006 to draw up legislation to enable launching of the Damascus Stock Exchange.

The insurance sector, previously monopolised by the Syrian Insurance Company, has now been opened to private investment, with enactment of law n°43 of June 2005 and nine companies have been licensed to start operations. According to the law, companies specialising in life insurance must have minimum capital of US$ 17 million, US$ 14 million for corporate general practitioners. Some

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private banks have started selling insurance products (bank insurance).

Telecom & internet in Syria To accelerate liberalisation of the sector, the Ministry of Telecommunications has announced very ambitious objectives to develop infrastructure and ICT by 2013. Investment of US$ 8 billion over 10 years will be required.

The fixed telephony sector is managed by a public monopoly, the Syrian Telecommunications Establishment. The STE has built an X.25 network with more than 2.4 million fixed lines, undergoing continuing development (finalisation of a contract with Siemens for the development of 1.65 million new lines) but the Frame Relay network is not yet available. It has a monopoly on internet and international communications infrastructure.

Since promulgation of law n°11 of 1991 liberalising telecommunication services, STE is gradually opening services to encourage foreign investors and granting new licences. The organisational structure of STE will be transformed into a private limited company, while maintaining a monopoly on infrastructure.

The Syrian data‐processing company “Syrian Computer Society” (SCP), founded in 1989, is an association grouping the majority of private actors, in charge of promoting a computer culture and data‐processing know‐how in Syria. It acts as a consultant for public organisations for acquisition of equipment and introduction of new technologies related to data processing and telecommunications. SCS is also the second largest internet provider and the first “private” ISP in the country.

Two private operators share the mobile telephony market: Syriatel and Spacetel. They operate on the basis of a seven‐year BOT (Build‐Operate‐Transfer) contract, but prices are set by STE. The number

of subscribers for pre‐paid and post‐paid services reached 1.185 million at the end of 2003 and the network grew considerably in 2004, reaching 1.8 million subscribers. A third mobile licence is planned for 2008. STE and the Syrian Computer Society are the two ISPs. The Best Italia Holding Company obtained a licence for internet by satellite in January 2005.

The Syrian Ministry of Telecommunications and Technologies has set the goal of reaching a penetration rate of 20 percent (four million users) by 2013. Internet broadband was launched in 2005 but for the time being ADSL access in Syria is expensive. In 2004, only 300,000 households had a computer. To increase the computer/household ratio, the SCS launched a programme at the end of 2004 in co‐operation with the Commercial Bank of Syria: “a computer for all”, allowing Syrians to buy computers on credit.

Business opportunities in Syria Syria’s economic policy has in the past been based on import‐substitution policies meant to protect domestic industries from foreign competition. A gradual process of opening up began in 1991, which has accelerated somewhat in recent years. Syria has clearly taken a number of steps to improve conditions for private investment. These measures include: simplification and reduction of certain tariff rates starting in 2001; a cut in the standard corporate tax rate on private companies to 25 percent in 2003; a 2001 banking sector law allowing private operators on the market, with four banks starting operations in 2004; and substantial investment in electric power generation. Thus, there are numerous business and investment opportunities, particularly in infrastructure, finance, and tourism.

The countryʹs transport infrastructure needs to be developed, upgraded, and modernised. According to the 2006‐2010 five‐year plan, Syria should invest the equivalent of US$ 523 million for

Invest in Syria

development of its eastern regions over the next five years, nearly LBP17 billion (US$ 323 million) in investments in the Hassake area and LBP10.2 billion in the region of Deir Al‐Zor area.

New oil refineries and an industrial park are also planned. The purpose of these investments is to make eastern Syria a platform for development towards Turkey and Iraq. Eastern Syria is indeed a strategic location for the country, playing a major economic role (oil, corn and cotton, major hydraulic resources thanks to the Euphrates, Khabour and the Tigris).

The highway network will double over the next five years, from 1100 km to 2300 km. Syria wants to capitalise on its geographic location to become a gateway for transit between the Mediterranean and Iraq and between Turkey and the Gulf countries. The Ministry of Transport hopes to attract foreign investors by proposing concession contracts in the form of BOT.

Other infrastructure development projects include modernisation of the ports of Lattakia and Tartous, the latter being the largest commercial port, enjoying an impressive increase in traffic thanks to growth of trade with Iraq. In addition, in this sector, the Ministry of Transport will grant private concessions for the management of part of the terminal in the form of a BOT contract.

The country’s five airports (Qamishli, Lattakia, Deir‐ez‐Zor, Aleppo, Homs) will be modernised and extended. As for the railway network, the objective is to set up express lines, such as Damascus‐Aleppo route, which will make it possible to get between these two major Syrian cities in less than two hours.

The services sector also offers many investment opportunities. Ongoing reforms, in particular in the financial sector, reflect the commitment of Syrian authorities to carry out a vast modernisation programme and a new legal framework for privatisation that will ease market access.

The banking and insurance sectors have been opened to private and foreign operators. In information technologies, the country’s telecom and internet grids will be extended and new operators, in particular on the web, are expected to propose new services and content.

Tourism is one of the most dynamic activities in the country. The government has adopted a new vision for tourism, with plans to make it a pillar of the national economy. Acquired skills should make it possible to advance to a new stage of development, with new hotels and leisure equipment that meet demand for elitist, cultural tourism. The country’s middle‐level hotel infrastructure is insufficient and in any case outdated and there is not much in the way of leisure facilities, aside from services offered at luxury hotels)

Following the Tourism Investment Market Forum held in April 2005 at which the Ministry of Tourism proposed 33 project ideas to foreign investors, 13 initiatives were contracted, worth US$ 600 billion and for the first time hotel management companies were authorised to enter Syria: Intercontinental, Holiday Inn, Royal, Accor and Soys Inn. At the 2006 Forum the government is offering investment opportunities in 43 projects located in 12 governorates.

A number of projects initiated several years ago by the private sector (such as the Damascus International Airport and coastal roads) are not yet finished. Old cities (especially in Aleppo and Damascus) attract a growing number of national and international investors, who buy and restore old homes for their own use or to open boutique hotels and restaurants. Opportunities in the tourist sector include:

Infrastructure: desalination of seawater, water purification, installation of electricity, telecommunications, transport;

Invest in Syria

Tourist products such as leisure equipment, entertainment and sporting activities, seaside resorts, spa therapy, museums, sound and light shows, consulting;

Products: construction, management, consulting, software;

Training: partnership with the Training Centre for Tourism and Hotel, upgrading of existing schools, creation of an institute of gastronomy;

Promotion: communications, marketing, board of trustees;

Financial investments: hotels, resorts, leisure clubs and parks, development of cultural sites, festivals.

Business opportunities also exist in agriculture and manufacturing. Syria has developed expertise and know‐how in agriculture, notably in cotton and olive tree production, but also greenhouse fruit and vegetable crops are developed, requiring new equipment, packaging technologies transfer, etc. Downstream, food processing industries, largely under public control, need to be progressively opened to new actors. In industry, aside from a few large oil facilities, there are dynamic small and medium industries, notably textile factories, pharmaceutical subcontracting firms and mechanical assembly firms.

Success story: the Spanish company Aceites del Sur has faith in the Syrian olive oil Aceites del Sur, one of the main Spanish groups in the olive oil sector, has started operating in Syria in May 2003. The Spanish company already exports to more than 65 countries in the world, especially to the Americas and to Russia. For several years it has been managing a regional office in Aleph (north of Syria), and it has decided to cross the threshold of delocalisation to be active in the whole region.

The new company, called Middle East Olive Oil Company (MEO), is a joint‐venture with the Bin Ladin Saudi conglomerate. Its plant is installed in the city of Idlib, in the north‐west of the country, in the olive groves region, on a site that covers more than 50,000m². Each day, it can extract 120,000 litres, produce 100,000 litres of refined oil, and bottle 150,000 litres. MEO employs 60 people, and it is the only company that covers the whole olive oil sector in Syria.

It is indeed too early to draw a conclusion about this investment, but MEO intends to grow rapidly on the local market, in a first phase, before targeting other markets of the region. It relies on two essential factors: the fact that Syria is among the five major olive producers in the world, and intends to become the leader thanks to a ‘’live tree park’’ in excess of 80 million trees, and on the setting up of the Arab Free Trade Zone which will eliminate the custom barriers between the countries of the region.

Tunisia

Overview

References

Capital Tunis Surface area 162 155 km2 Population 10,175,014 inhabitants Languages Arabic, French, English, Italian GNP (dollars) US$ 31,9 bn (2005) GNP/per capita US$ 3,148 (8,600 in ppp.) in 2005 Religion Muslims (98%), Christians, Jews and

others (2%) National holiday 20th March (independence in 1956) Currency (March 2007) Tunisian Dinar (TND)

1 EUR=1.76 TND – 1US$ =1.31 TND Association agreement with EU

Signed on; 17 July 1995, implemented since March1998. EU web site: http://www.ce.intl.tn/

WTO membership Member since 1995 Sources: IMF, WDI 2006 and Consultations Article VI 2005, January 2005

Economic profile

With its temperate climate, proximity to Europe, socio‐political stability, and a fairly skilled labour force, Tunisia enjoys significant comparative advantages. Having opted early on for a market economy and progressive integration in the world economy, the country’s economic policy has succeeded in boosting private sector involvement, diversifying its industrial base, and containing the

social cost of structural adjustment, a pre‐condition for political and social stability.

Tunisia was the first country (in 1995) to sign the free trade agreement with the European Union in the framework of the Euromed initiative. Between 1992 and 2004, Tunisia’s GDP rose by an average 4.1 percent, reaching a record 5.8 percent in 2004. The 2005 performance was for the most part positive (4.2 percent of GDP), despite tougher international competition and rising oil prices, sustained by favourable growth in service activities such as tourism (6.4 million tourists, TND2.563 million, some 12.5 percent of current revenues), air transport, telecommunications, and new technologies. For 2006, the latest estimates forecast GDP growth of 4.6 percent.

The manufacturing sector, in particular textile/clothing industries, has been the spearhead of Tunisia’s economic development since 1972, stimulated by a policy of foreign investment promotion and exports. 42 percent of overall manufacturing output is exported, thanks in particular to subcontracting activities. Manufacturing industries account for 20 percent of GDP and employ 20.5 percent of the labour force, whereas agriculture and fishing contribute for 14.3 percent of GDP and provide 22 percent of jobs and tourism generates 15.6 percent of GDP. The country counts more than 10,000 industrial companies.

A structural adjustment or ʺupgradingʺ programme has been introduced to improve the competitiveness of the manufacturing sector and related service companies in order to prepare companies for implementation of the free trade zone with the EU. In parallel, a strategy of export promotion was launched to strengthen export capacity at the company level. One component of this strategy is the institution of a documentation called the “single bundle” (liasse unique) for imports and exports. As early as 1989 the Government also set up a legislative framework for privatisation. There have

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been several reforms of the financial system, targeting sounder finances at banks and insurance companies and diversifying the range of financial products available to economic operators.

Thanks to a prudent monetary policy at the Central Bank of Tunisia (BCT), the inflation rate has fallen from 6.3 percent in 1995 to about 2 percent today. The Tunisian Dinar (TD) is convertible for current operations and a foreign exchange market was created recently, the objective being to reach total convertibility of the Dinar over the long term. Tunisia’s total national debt is projected at approximately US$ 16.3 billion for 2005 (57.6 percent of GDP) and its foreign debt is estimated at US$ 15.7 billion (54.9 percent).

As a result of its trade liberalisation policy, Tunisia has enjoyed dynamic exports, a narrowing of the trade deficit, and diversification of its export base. In 2005, the volume of trade reached TD 31 billion (EUR19 billion), despite difficult international economic conditions: an end to the multifibre agreement, soaring oil prices, and an economic downturn in Europe. The coverage rate of imports by exports increased from 69.6 percent in 2001 to 79.6 percent in 2005.

Still, the trade deficit remains high, at 9.3 percent of GDP (vs. 14.5 percent in 2001), but this is partially offset by surpluses in services, factor income and transfers.

Tunisian trade is conducted to a large degree with the EU: nearly 70 percent of Tunisian imports come from the EU, which is the destination for 80 percent of the country’s exports.

The country’s main exports are clothing, textiles, leather, and footwear (almost half of total), electrical equipment for the automotive industry, chemical products (mainly phosphate fertilizer), and fuel (fuel oil). Imports are more diversified and include textiles (generally used to make clothing), agricultural products (especially cereals and other food products), and industrial goods. The high degree of foreign inputs in domestically

produced goods is because raw materials and semi‐finished products account for nearly 30 percent of imports. Most of Tunisiaʹs trade, especially its export trade, is with the EU. Nearly 70 percent of Tunisian imports come from the EU, which also absorbs 80 percent of its exports. In 2005, Tunisian imports from EU countries cost EUR 7.32 billion, with the EU’s market share falling from 71.6 percent in 2001 to 69 percent in 2005. Tunisian exports to the EU earned EUR 6.75 billion. France alone supplied over 27 percent of total imports (26 percent in 1995), accounting for one third of the export market. Italy and to a lesser extent Germany are the country’s other main trading partners.

Tunisia is traditionally a net exporter of services. Tourism accounts for more than half of foreign exchange earnings from non‐factor services, TD 2.564 billion in 2005. Remittances from Tunisian workers living abroad have increased steadily and now rank just behind earnings from tourism (TD1.783 million).

At the end of 2005, more than 2700 foreign companies or joint ventures were operating in Tunisia, employing nearly 260,000 people, 72 percent of these companies being export‐oriented (i.e. exporting their entire production). FDI accounts for 10 percent of productive investments and generates one third of total exports and a sixth of employment. From 1990 to 2005, foreign direct investment (FDI) rose from TD 78 million to approximately TD 1.016 billion (2.7 percent of GDP). More than 32 percent of the sums involved have been invested in manufacturing, 38 percent in the energy industry, 22.4 percent in services including 2.8 percent in tourism and property, and 1.3 percent in agricultural activities. Overall, FDI comes mainly from the European Union, but also from the United States and the Middle East.

Tunisia was the first MEDA country to sign the Association Agreement with the EU, in the framework of the Barcelona process. This was concluded on 17 July 1995 and came into effect on March

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1st, 1998, but tariff dismantling began early in Tunisia, on 1 January 1996. The agreement stipulates reciprocal liberalisation of trade in goods by 2008.

The Agreement provides for duty‐free trade for the majority of industrial products 12 years after its entry into force. Customs duty for list 1 (capital equipment and inputs) was dismantled in 1996. Products on list 2 (raw materials and intermediary products not produced locally) have been entering duty‐free since 2001. Lists 3 and 4 consist of locally manufactured goods. List 3 comprises products considered able to face up to outside competition, with protection removed over a 12‐year transition period (1996‐2007), with duty‐free status by 2008. List 4 also concerns industrial products manufactured locally, but for these items, tariffs will be reduced over an 8‐year period (2000‐2007), following a 4‐year transition period (1996‐1999), with duty‐free status by 2008. The Agreement also envisages the progressive liberalisation of certain agricultural and fishing products. Preferential tariffs for agricultural and fishery products originating in Tunisia, in particular olive oil, meat, roses, cut flowers, spices, fruit and vegetables (the latter only at specific periods of the year), canned fruits and vegetables, wine, and processed fish and shellfish.

In 2000, further negotiations led to signature of a new five‐year agricultural protocol, with an implementation beginning in January 2001. This provided better access for Tunisian products, including an increase in quotas, particularly for olive oil (up to 56,000 tonnes in 2005); an extension of market access periods; and introduction of a number of new products. For its part, Tunisia granted preferential tariff quotas to the EU for cereals and sugar for the first time. On the agenda for 2006 is the renegotiation of the agricultural protocol and the launch of negotiations on the right of establishment for companies and the liberalisation of services.

Tunisia is a founding member of WTO, a member of the Arab Maghreb Union that also includes Libya, Algeria, Morocco, and Mauritania, and a member of the League of Arab States.

It is also a signatory of: the Arab‐Mediterranean free trade agreement with Morocco, Egypt and Jordan (the Agadir Agreement) dated 25 February 2004; a free trade agreement with Turkey dated 25 November 2004 and in force since July 2005; and a free trade agreement with the European Free Trade Association (EFTA) dated 17 December 2004. As regards investment protection, Tunisia adheres to many international conventions, the Multilateral Agency for the Guarantee of Investments (MIGA) and the International Centre for the Settlement of Investment Disputes (ICSID). It has signed bilateral agreements concerning investment protection and elimination of double taxation with the majority of OECD countries as well as bilateral agreements guaranteeing mutual investment protection with about fifty countries.

Tunisia has already laid down guidelines for the development and consolidation of a knowledge‐based economy by focusing on four complementary and interdependent elements: education and training, research & development, information and communication technologies, and innovation and organisational systems. Substantial progress has been made in these areas, particularly in upgrading human resources, creating technology centres, intensifying scientific research, diversifying specialisation at the level of higher education, and strengthening infrastructure, especially in the information and telecommunications technology sector.

Medium‐term prospects are promising. According to the IMF, solid growth in real GDP should accelerate in 2006 (+ 1 billion USD foreseen) on the strength of agricultural recovery and higher industrial production and construction activity. Inflation has been successfully kept down. External balances have improved despite

Invest in Tunisia

fallout from phasing out of the multifibre agreement (which has been limited so far), rising oil prices on international markets and sluggish demand on the European market. International reserves continue to grow, corresponding to 3.5 months of imports of goods and services.

Tunisia has committed to a vast privatisation programme, with transactions giving a positive signal to the private sector and contributing to a better image of the country as an investment site, attracting more foreign investors.

Almost 200 public companies had been privatised as of the end of 2005, generating receipts of TD 2.5 billion (almost EUR1.5 billion at the exchange rate in effect at that time). Nearly 73 percent of this revenue comes from foreign investment, with FDI inflows amounting to nearly 15 percent of overall foreign direct investment in Tunisia at the end of 2005. 2005 inflows were estimated at TD 146 million (EUR90 million), with two operations accounting for 77 percent of this total: privatisation of the “Bank of the South” to the Wafa Bank/Banco Santander consortium for TD 98 million and sale of the SOTACIB cement factory to the Spanish Grupo Prasa for TD 14.5 million.

At the beginning of 2006, 35 percent of Tunisia Telecom capital was sold to TeCom Dig (Dubai), generating TD 3.050 billion in income, more than the cumulative total of revenue from privatisation since 1987.

Country risk

Overall, ratings by the main agencies improved, thanks to the country’s sound finances, guaranteeing access to international capital markets.

R&I (ex‐JBRI): BBB+ in 2005 with BBB+ positive prospects since February 2006.

Fitch IBCA: BBB (AAA is the best rating and D the worst, on a scale of 1 to 34).

Moodyʹs: Baa2 (Aaa is the best rating and C the worst, on a scale of 1 to 27).

Standard & Poorʹ S: BBB (AAA is the best rating and D the worst, on a scale of 1 to 18).

Coface: A4 (A1 is the best rating and D the worst, on a scale of 1 to 7).

Key challenges

Exogenous factors such as the European demand and the climatic risks strongly determine the trend of the growth.

An increased effort of investment and modernisation of the companies is essential to improve competitiveness of the Tunisian products, in particular in the textile sector.

The situation of the banking system remains fragile and reduces the access to credit for the companies.

Tunisia does not have many natural resources and is dependent on imports for its energy needs and thus on the world levels on oil.

Unemployment reaches 14.2% of the working population. It is accentuated by the arrival of many young graduates on the market. The principal challenge is to increase the current annual economic growth from at least 1‐1.5% before 2010 in order to reduce the unemployment that the graduates are more and more facing.

Strong points

The implementation of economic reforms attracts foreign investors. This policy is facilitated by the support of the European Union and of the international community.

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The solvency of the country favours its access to the international capital markets.

The increasing diversification of the economy reinforces its resistance to the global economic situation.

Tunisia enjoys a strategic position in the Mediterranean. Tunis is at 2 hours flight in average from the main European capital cities.

A developed social system and an ambitious education policy aim at attenuating the social cost of the adjustment and at reinforcing the modernisation of the country.

Tunisia has a qualified, productive work force and competitive wages. Thanks to the reforms of the education, the new graduated arriving on the labour market represent more than half of the additional needs planned for the period 2002‐2006.

In addition, the Finance law 2007 as well as measures in favour of technological innovation and economic competitiveness should create a very favourable environment for SMEs.

The government has indeed set the target of creating 70 000 companies by 2009. Two tools in particular were created at the end of 2006: the Bank of financing for small and medium companies (BFPME), aimed at focusing on innovative projects; and the Tunisian Company of guarantee (SOTUGAR) to secure the investors and guarantee the profitability of the projects.

Tunisia’s innovation policy deals with:

Institutional and legal reforms: Revisions and introduction of laws concerning the legal framework of the technopoles; the intellectual property and the patent procedures.

The reinforcement of the coordination between the various players in research & development.

The development of the necessary competences and human resources.

The mobilisation of financial resources to promote technological innovation.

The Foreign Investment Promotion Agency (FIPA) The FIPA was created in 1995 under the umbrella of the Ministry for Development and international co‐operation. The agency employs 70 people and has a network of 5 offices located abroad in Brussels, London, Cologne, Milan and Paris. The role of the agency is to promote Tunisia as a site for investments, to help the foreign investors to settle in Tunisia and to propose measures to improve the investment environment.

For the implementation of its mission, FIPA employs international consultants to make comparative studies on the factors of localisation and the production costs of several products in Tunisia, in order to provide the investors with a neutral vision and benchmark of the Tunisian competitiveness and attractiveness.

FIPA also provides the investors with several documents and promotional supports offering useful information on the economy, the cost factors, the infrastructures and the incentives programmes.

Web Site: http://www.investintunisia.com/

How to invest in Tunisia Tunisia set up an attractive legal framework for foreign investment back in the seventies (including, notably, creation of offshore companies), strengthened in 1993 by creation of the Investment Incentives Code (CII). The Code guarantees freedom of investment for foreigners to set up, expand, update, or transform activities.

Direct investment in most manufacturing industries as well as in certain service activities is eligible for the incentives outlined in the CII. Non‐eligible manufacturing industries include, for example, oil

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refining and certain other activities are subject to prior authorisation or specific conditions. Service activities covered by the CII (unless they export their entire production) are also subject to prior authorisation from the CSI when foreign holdings exceed 50 percent of company capital.

The CII distinguishes ʺwholly exportingʺ enterprises (at least 70 percent of turnover coming from exports) from ʺpartially exportingʺ enterprises. The increasing importance of exports in the mid‐80s led to further development of this regime, giving rise in 1992 to the concept of ʺfree economic zoneʺ and then ʺeconomic activity parkʺ, which is in fact an industrial estate.

The CII provides for both common and specific benefits. Common benefits consist mainly of tax exemptions, including deduction of invested funds from taxable profits, up to a ceiling amounting to 35 percent of the latter; a reducing‐balance depreciation regime; and exemption from customs duties and taxation at a reduced VAT rate of 10 percent on material essential to the company. Specific benefits are set in accordance with horizontal objectives such as export promotion, regional and agricultural development and the promotion of technology.

Specific advantages such as exemption from corporate tax for 10 years and 50 percent reduction of taxable income starting from the 11th year for an unlimited period of time, exemption from registration fees, total exemption from tax on capital equipment including means of transport, raw materials, semi‐manufactured goods and services necessary to the activity are granted to export oriented companies. It should be noted that the rate of income tax for any company passed from 35% to 30% at the end of 2006.

Foreigners can acquire up to 100 percent of capital in a Tunisian company without any prior authorisation. However, certain service activities (banking, insurance, investment companies, stock brokers and forwarding agents, transport and port activities…) other than

wholly exporting businesses are subject to approval when foreign holdings exceed 50 percent of capital, but Tunisia has committed to eliminating this restriction in the framework of Structural Adjustment Facility IV by 2006‐2007.

Furthermore, the exercise of commercial activity by a foreigner requires a commercial license, issued by the Ministry of Trade. This is the case notably for wholesale distribution, retail trade, and the restaurant trade. However, foreigners can establish international trading companies (SCI) working in import and export, provided that at least 70 percent of the SCI’s annual turnover is generated by exports. Certain independent professions, such as lawyers, accountants, and architects can be exercised solely by Tunisian nationals. Certain service activities such as sales representative, broker, salespersons, and agents are also limited to Tunisians, unless an exception is made by the Ministry of Trade.

Specific financial and tax incentives are provided by the CII for investment in “regional development zones” and “priority regional development zones”.

They include, among other things, total exemption from tax on income or profits for the first ten years after the actual start up of production and 50 percent exemption over the following ten‐year period. Financial benefits include a subsidy equal to 15 percent of the overall cost of investment, up to a ceiling of TD 450,000‐700,000 for projects in regional development zones.

Formalities for setting up a company can be accomplished at the “one stop shop” run by the Industrial Promotion Agency (API) in Tunis, Sousse and Sfax. A limited company can be set up in three days on average. With the finance law 2007, new tax incentives were introduced for transferring companies. These provisions also concern on the take over of companies facing economic difficulties. Provided that the new owner keeps the activity and maintains the jobs, these operations are tax free. The law also allows the

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companies that have been sold to continue benefiting from the incentives allocated to foreign investors.

For transfer of capital, companies investing in Tunisia are free to repatriate profits as well as any foreign currency brought into Tunisia. Interest, dividends, and profits earned by non‐resident investors are tax‐free and can be repatriated without any restrictions. Beside this, the 2007 Finance Law provides decisions towards non resident people owning over 50 percent of a Tunisian company. They can now freely manage the accounts of these companies and contract short‐term loans, in Tunisian Dinars or foreign currencies.

Tunisia has two kinds of economic activity zones. Exporting companies have the advantage of a tax system similar to that applied to free trade zones as well as an access to the one‐stop shop that facilitates setting up a business, and also addresses construction issues and public utilities, etc.

Imports are free for a large majority of products, handled by means of a foreign trade certificate domiciled with the bank responsible for implementing financial regulations. A foreign trade certificate is valid for six months. Imports by “totally exporting companies” and companies in free trade zones are not subject to foreign trade formalities.

Finance & banking in Tunisia Significant measures have been taken to consolidate and modernise the banking environment and to improve the diversification of the financing sources. Privatisation of the banking environment has been accelerated, the legal and regulatory framework modernised by introducing universal banking and the alignment to international prudential standards. The action plan targets enhanced banking operations by consolidating the financial base, strengthening prudential and supervisory regulations, and

modernising the management methods to improve the quality of services.

The banking environment includes the Central Bank, 20 trade and development banks, two investment banks, eight offshore banks, nine offices representing foreign banks, and specialised financial institutions such as two factoring companies and 11 leasing companies. Interest rates are freely set.

Banking legislation has strengthened prudential rules and the solvency ratio. The commitment/capital equity rate is 8 percent, in accordance with Basle II international norms. The latest reforms have introduced the concept of universal banking and implemented an electronic clearing system for transactions, implemented a scheme to guarantee deposits and loans as well as made considerable progress in introducing electronic money.

The sector is being opened to foreign partnerships and the government sold its 52 percent stake in the Union Internationale de Banque (UIB) to the French Société Générale while privatising the Banque du Sud.

The money market has undergone major transformation in both structure and products. It is managed by a private entity and the monetary market council regulates the sector and monitors operations.

Quotation on the stock exchange is handled by an electronic system and there are 46 companies currently listed on the Tunis Stock Exchange. Acquisition by foreigners of shares in companies listed on the stock exchange does not require an authorisation if no more than 50 percent of capital is acquired. Foreign investors hold 21 percent of market capitalisation.

Close‐ended (SICAF) and variable (SICAV) investment companies and private capital venture funds (SICAR) have multiplied, numbering 158 at the end of 2002.

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The Tunisian Dinar is convertible for current operations since 1994 and the foreign exchange market handles buying and selling of foreign currency.

Transfers relating to capital income (profits, remuneration of founders’ shares, dividends, percentages and attendance fees, interest on loans), transfers relating to commercial deals and related operations, and transfers relating to production operations and real net proceeds from the sale or liquidation of capital funded by means of imported hard currency, are free.

Market capitalisation amounted to TD 3.840 billion in 2005, with 46 listed companies.

The BVMT Index (base 465.77 on 31 March 1998) hit 1142.46 points (974.82 in 2004) and the TUNINDEX index (base 1000 on 31 December 1997) rose to 1615.12 points (1331.82 points in 2004). The liquidity ratio was 55 percent.

The programme for implementation of an alternative money market on the Tunis Stock Exchange began on 1 March 2006. This initiative aims at facilitating access by industrial SMEs to the money market so they can diversify their sources of financing. Companies that want to be listed on this new market (which will have simplified admission criteria) can take advantage of expert advice to prepare for quotation on the stock exchange. Initial quotation should take place by the 1st of March 2007.

Telecom & internet in Tunisia Telecommunications infrastructure is highly developed in Tunisia. The telecommunications network counted some 7 million subscribers in 2005, including 5.7 million mobile subscribers. Approximately 9.4 percent of the population had access to internet in 2005, with nearly a million subscribers. The communication and information technologies sector posted high growth of about 21

percent. The Tunisian Government in 1999 set the goal of providing all Tunisians with access to high‐level telecommunications services in terms of quality and cost.

The 10th Economic and Social Development Plan (2002‐06) has scheduled TD 2.8 billion in investment in telecommunications. The principal measures relating to modernisation and development of ICT infrastructure are the improvement of phone network coverage and quality, higher internet network capacity, better networks to exchange data between users (educational, commercial). A whole set of actions and measures were adopted in the data‐processing sector, relating in particular to electronic administration, support for the private sector to invest in the field of data processing, promotion of the national software industry, and diffusion of electronic culture on a large scale.

In parallel, Tunisia started opening the sector to competition, in line with GATS commitments and in preparation for future negotiations with the WTO.

Several important actions were undertaken to update the legal framework and adapt it to the reference document annexed to protocol IV on basic telecommunications, in particular adoption of a new communications code and establishment of an independent regulatory agency.

The traditional operator, Tunisia Telecom, is the sole supplier of most basic services (fixed telephony, telex, fixed satellites and rented lines). 35 percent of capital at Tunisia Telecom was sold at the end of 2005 to TeCom Dig (Dubai) for TD 3.05 billion, more than the cumulative total of revenue from privatisation since 1987.

Two operators share the cellular telephony market: Tunisia Telecom (Tunicell) and the Egyptian company Orascom Telecom Tunisia (OTT), which acquired its licence at a cost of TD 680 million. According to authorities, OTT had more than one million subscribers in 2005, with turnover of approximately TD 375 million.

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The Tunisian Internet Agency (ATI) manages the internet network at the national level. There are twelve providers (ISP) in all, seven public and five private, and 281 public access “Publinet” facilities. Connection to ADSL has been available since May 2002 but growth has been slow because of cost, considered to be too high.

Call centre export of services has enjoyed major development over the past few years. There are currently seven foreign call centres employing 1,100 people, six of which are totally exporting companies. According to official sources, “new relatively advantageous technical and financial conditions for the acquisition of powerful telephone systems, meant to attract foreigners (even if they are not specific to call centres) explain to a great extent their development in Tunisia”. Technical factors specific to Tunisia include the ready availability of skilled staff, fluency in French, and favourable labour costs compared to other countries.

Business & investment opportunities in Tunisia The prospects for major upgrading of Tunisia’s manufacturing sector are good, thanks in particular to the upgrading programme. Maintaining exports will depend on the capacity of Tunisian companies to specialise in activities that can compete in the new context of free trade with the European Union.

Tunisia decided in the second half of the Nineties to modernise its industrial fabric. In conjunction with the Association Agreement, the EU is assisting the Tunisian governmentʹs upgrading programme (Mise à Niveau) to enhance the productivity of Tunisian businesses. The programme was relayed in 2003 by the industrial modernisation programme, which aims to support the industrial modernisation process in order to boost the economy and prepare SMEs to compete in the global marketplace.

Goals are to develop company competitiveness through technical assistance (coaching and quality), to diversify Tunisian industry by

encouraging the establishment of new businesses, and to improve the business environment. The industrial modernisation programme is implemented by the Ministry of Industry, Energy and Small Businesses, which has formed a special management unit for this purpose: the UGPMI. Coordination is handled by a national officer, who represents the Ministry of Industry, Energy and Small Businesses within the Programme.

The Tunisian government provides financial support to Tunisian SMEs in an amount corresponding to 70 percent of intangible investments. There are opportunities for consulting companies specialised in organisation, training, quality, certification, standardisation, production methods and management of innovation.

In terms of sectorial opportunities, Tunisia has comparative advantages in various sectors, identified by strategic studies. In the following sectors, certain branches or niches of activity are considered of particular interest, with great potential:

Food products: prepared and partially prepared dishes, tomato‐based products, semi‐conserved food, dried/dehydrated/freeze‐dried items, cheese, deep‐frozen products, ice cream, preparation and processing of wine, modern olive oil plants, olive oil packaging, date packaging, organic dates, a unit to process seafood left over after sorting by size, a unit to produce dried tomatoes, organic jams, fresh and stuffed pasta, setting up of grain storage silos.

Building materials: single‐layer mosaic tiles, granite block processing, automated brickworks, semi‐automatic tile manufacturing, a unit to manufacture high‐performance insulated windows, a unit to produce laminated glass (flat or curved) using the vacuum process, an automated unit for the manufacture of footed glassware (blowing process) in sodo‐calcic glass, a semi‐automated line for the manufacture of table

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glassware by pressing or centrifuging, a semi‐automatic manufacturing line for high quality crystal glass, plans for a shop to process flat glass for decorative purposes, a unit for decorating hollow glass.

Metal and mechanical industries: setting up of a Tunisian pole for metalwork, a unit to study and produce isothermal bodywork for large commercial vehicles, modernisation and transformation of an existing foundry, a foundry for low melting point non ferrous material, automated, with gravity flow (alloy foundry).

Car parts: cable harnesses, ringed tubes for cable harnesses, exhaust systems, brake plates, moulds, clutch fittings, electrical cables, interior equipment, rubber parts.

Electrical, electronic and household appliance industries: networks, security and safeguarding, intranet and electronic commerce, advanced management and corporate information systems, wiring of cards in small series, meters, over moulding for electrical parts.

Chemical industries: technical injection plant, extrusion of large sections or tubes, blowing of hollow bodies, manufacture of plastic sections, shaping of plastic sections, moulds, extrusion, rotocasting, large thermal‐moulded items, composites, concentrated liquid detergent in flexible pouches, concentrated detergent bleach, fabric softener.

Textiles and clothing: gabardine fabric, denim fabric, pants fabric, shirt fabric, work clothes fabric, chain and weft fabric finishing, dress pants, jeans, shirts, bras, men’s ready‐to‐wear clothing, mesh clothing and finishing.

Leather and footwear industries: dress shoes, safety shoes, a unit for the manufacture of small leather goods, a unit for the manufacture of handbags.

Other manufacturing products: seats, office furniture, interior furniture, modular interior furniture, digital printing (ʺQUICK PRINT SHOPʺ) companies, cleaning/sorting/filing/baling of old paper and cardboard, a factory to turn recycled paper into corrugated material (corrugation and test liner) to manufacture corrugated cardboard.

For more information on project opportunities, see the very helpful website of the Industrial Promotion Agency (API): www.tunisieindustrie.nat.tn/guide

In the tourism sector, a vast hotel modernisation project to be carried out over seven years was launched in 2004, with financing needs estimated at TD 1.5 billion. International donors (TD 50 million from the Islamic Development Bank, FADES) are expected to contribute to this programme. Business opportunities are also available in the second phase of work, involving equipment and training. Regarding tourism infrastructure, many projects are in the pipeline (marinas, yacht clubs), likely to interest foreign investors, in particular management of marinas (coastal traffic, town navigation, adaptation of structures to meet customer demands).

Technological partnership, privatisation and concessions are being sought to implement major projects. The privatisation agenda for 2006 included seven industrial and nine service companies. More information is available at:

http://www.privatisation.gov.tn/www/fr/home.asp

Privatisation of the Tunisian Automotive Industries Company (STIA) is on the agenda. Created in 1961 and specialised in the assembly of buses, coaches and industrial vehicles, the company has two production sites. 99.98 percent of capital will be yielded in block and UBCI (owned by BNP‐Paribas) will act as consultant for the Tunisian State.

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Other privatisation operations include: sale of 35 percent of capital in the National Oil Distribution Company (SNDP), transfer of all public holdings (51.59 percent) in the Tunisian Tire Industries Company (STIP), and transfer of the lime manufacturing unit of the Tunisian Lime Company (S.T.Chaux). A strategic partner is being sought for capital increase at the Tunisian Insurance and Reinsurance Company (STAR).

In addition, and in the framework of its privatisation strategy, Tunisia is moving increasingly towards private sector involvement in carrying out infrastructure projects in order to mobilise private investment and foreign direct investment in the sector and to facilitate economic integration on world markets.

Telecommunications (35% of Tunisia Telecom operator have been sold in 2006 to TeCom Dig from Dubai), electricity and gas (87,5% of SITEL ‐ Société Industrielle Tunisienne dʹElectricité ‐ sold to a Gulf consortium in 2000), drinking water and sewage/sanitation (47,5% of SOSTEM ‐Société des Stations Thermales et des Eaux Minérales‐ sold to a Tunisian company in 2002) are sectors recognised as worthy of foreign or Tunisian private/public partnerships. Initial results of a study on the construction under a concession arrangement of a deep‐water port (17 m with draught) to handle containers, semi‐trailers, and mobile cases were presented in January 2006.

The port and supporting logistic activities will be located north of Enfidha, 100 km south of Tunis. Initial financial negotiations project investment ranging from EUR 600 to 785 million for phase 1 and from EUR 1100 to 1335 million by phase 3. Complementary studies will be undertaken shortly to launch the call for tenders at the end of 2006.

The Office of the Merchant Marine and Port Authority (OMMP) has just issued invitations to tender for three large‐scale concessions for the construction and operation under a BOT arrangement of a

container terminal at the port of Rades and construction/operation of a logistic zone, also at the port of Rades.

A national invitation was issued to tender for the construction and operation under a BOT arrangement of a terminal for cruise ships at the port of La Goulette.

More information on these invitations to tender is available on the OMMP website: www.ommp.nat.tn

At the end of 2005, a pre‐qualification tender was launched for the construction and operation of an oil refinery at the Skhira oil terminal, under a 30‐year BOO (Build Operate Own) arrangement. Refining capacity would be 120,000 to 140,000 barrels per day and investment is estimated at between 1 and 1.2 billion Euros. The other main concessions involve:

The National Water Exploitation and Distribution Company (SONEDE): Operation under concession of a desalination unit in Jerba. Selection of an investment bank and launching of an international tender are planned for the fourth quarter of 2006.

The technical‐economic study has been finalised concerning a concession for the Tunis‐South purification station at El Allef. The invitation to tender is planned for the third quarter of 2006.

A concession for work at the Olympic Sports Complex in Rades will be the object of an invitation to tender to be launched the second quarter of 2006.

A study on tapping private sector involvement for investment and exploitation in the field of solid waste disposal in Tunisia (Public Private Partnership) is at the stage of selecting an engineering agency.

The invitation to tender has been sent out concerning construction of the Enfidha Airport by means of a concession.

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Furthermore, Tunisia offers various investment opportunities in the framework of technological parks and technopoles.

The telecommunications technological park, the second largest in Africa and 31st in 104 countries, was considered the most advanced in the ICT sector, ahead of Italy, Hungary, South Africa and Morocco according to the 2004 World Economic Forum, able to meet the needs of new information technology companies. Indeed, many foreign high technology companies and major foreign groups (call centres, internet research centres etc.) are locating at this park, which has undergone successive expansion to meet the ever‐growing needs of these companies. Indeed, many high tech companies and major foreign groups are setting up business in the field of new information technologies: call centres, internet research centres... Six new sectoral technopoles are being built throughout the country, each specialised in an area of particular relevance for the region in which it is located:

The technopole at Borj Cedria is specialised in renewable energy, water, environment and plant biotechnology. It will group a number of higher institutes (environmental sciences and technologies, computer activities, and technological studies) and three research centres working in these sectors.

The technopole in Sidi Thabet is specialised in biotechnology and pharmaceutical industries. It groups a number of higher institutes as well as Tunisia’s veterinary school and the national centre for nuclear sciences and technologies.

The technopole in Sousse works in the mechanical, electronic, and computer sectors. A business incubator and technological resources centre are now installed at this facility.

The Sfax technopole handles computer and multimedia activities. Training and scientific research are provided by a number of computer and multimedia institutes and research centres.

The Monastir technopole focuses on textiles and clothing. The higher institute for fashion and the physico‐chemical research centre are some of the structures found at this technopole.

The Bizerte technopole supports agrofood industries, with a food technology and sciences research centre and the national engineering school of Bizerte.

Tunisia: The Spanish group Uniland invests in the Enfidha cement plants In 1998, in the context of the privatisation programme, four of the country’s six cement plants were sold to private foreign operators. The Spanish group Uniland acquired the Enfidha cement company for 168 million dinars, in which it now holds a 88% stake, the remaining 12% being held by the Islamic Development Bank. The operation provided immediate access to a share of the country’s market. The long term objective is to position the Tunisian site as a strategic base for regional deployment. Today, the Uniland Group has a cement factory, an aggregate quarry and 4 concrete plants

The Enfidha Cement Company’s plant is located at Ain M’Dhaker, 10 km from the town of Enfidha, North of the governorship of Sousse. 190 million dinars have been invested to modernise the first production line and to create a second, with an annual capacity of 600,000 tonnes. An overall programme to bring the plant up to the standards of the group has also been initiated (computerisation, stock management, respect for the environment).

At the same time, the Uniland group, which had a turnover in 2005 of 473 million Euros, is present in the concrete business through its subsidiary Select Béton, a company belonging 100 % to the Enfidha Cement Company. The Tunisian concrete market is in full expansion, is modernising and becoming automated. With four production plants, Select Béton is the leader in the sector. These sites « also have mobile plants ready to participate in any type of

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large undertaking which require an ʺ in situ ʺ plant, underlines the company.

«The main objective of the Uniland Group in Tunisia is to position itself as the reference in terms of quality and services » states the group, whose Head Office is in Barcelona. Select Béton S.A. is « the only Tunisian concrete manufacturing company which has three certifications of quality available in the country: NT certification (product), ISO 9000 certification (production systems) and BVQi certification (procedures) ».

Uniland, bought meanwhile by another Spanish group, Cementos Portland Valderrivas, in June 2006, still expects one long‐awaited change to be made: the complete liberalisation of cement prices which are maintained under public control.

Turkey

Overview

References

Capital Ankara

Surface area 774,820 km2 Population 72,000,000 inhabitants ‐2006) Languages spoken Turkish (Official), Arab, Greek, Armenian,

Kurd, Ladino GNP (dollars) US$ 362 bn in 2005 GNP/per capita (dollars)

US$ 5,800 (7,950 in ppp.) in 2005

Religion Musulmans (99%) Currency (March 2007)

Turkish New Lira (TRY) 1EUR = 1.85 TRY ‐ 1 US$ = 1.38 TRY

National day 29th October (Republic ‐1923) Fiscal year 1er July‐30 June Association agreement with EU

Customs Union since 31/12/1995 Negotiations in progress for EU membership since 3/10/2005. EU web site: http://www.deltur.cec.eu.int

WTO membership Member since 26/03/1995

Sources: TURKSTAT, Ministry of Finance, World Bank (CAS Report and CAS Progress Report), IMF (Word Economic Outlook Database 2006)

Economic profile

With a population of 72 million and estimated GDP of US$ 403 billion in 2006, Turkey is ranked the 20th largest economy in the world by the World Bank and one of the most dynamic emerging markets. Spanning continents, at the crossroads of Europe, Asia

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and the Mediterranean, Aegean Sea and Black Seas, its geographic location has made it a strategic country over the centuries.

Relations with the European Union are based on an association agreement known as the Ankara Agreement, signed on September 12, 1963 and effective December 1, 1964. The final phase instituting a customs union took effect on December 31, 1995, involving free movement of goods, adoption of the EU’s Common Customs Tariff, harmonisation of technical legislation, and regulations in the fields of intellectual, industrial and commercial property, competition and taxation.

A candidate for entry in the European Union since 1999, Turkey aspires to membership with the 27 states. Seventeen years after Turkey’s initial request for accession, the European Council agreed to open negotiations regarding adhesion on October 3, 2005. Turkey has committed to a long process of reform involving 35 goals, in conformity with the Copenhagen criteria, pre‐conditions to entry in the EU. The European Commission has begun screening, the first phase of negotiations for adhesion, which makes it possible to evaluate the degree of preparation of countries applying for accession before deciding if a chapter can be opened for negotiation.

Turkey has undergone three major disasters and economic crises over the last ten years, in 1994, 1999 and 2001. The latter was particularly severe, marked by 50 percent devaluation of the currency, collapse of the banking sector, severe recession (a 6.7 percent decline in GDP), inflation of some 70 percent, and a net public debt to GNP ratio exceeding 90 percent. In response to the economic crisis, the government worked out a reform programme over the period 2002‐2004 with support from the International Monetary Fund (IMF) and the World Bank. These reforms have had a positive impact and the economy has started to rebound rapidly, with gross national income up by 8.9 per cent in 2004 and 7.4 per

cent in 2005, driven by private consumption, private investment, and export growth.

Recent obstacles have mitigated the benefits derived from the decision to open accession negotiations in terms of higher domestic and international confidence, without affecting deeply Turkey’s growth rate for 2006, which, according to the latest estimates should be around 5.2%. According to IMF projections based on purchasing power parity, per capita GDP, which rose to US$ 6737 in 2002, will reach US$ 8393 in 2006.

The share of manufacturing and service activities in the economy has increased steadily over the past decade, while that of agriculture has declined. Agriculture’s share of gross added value fell from 18 percent in 1990 to 12 percent in 2004 (although it employs more than 34 percent of the population), while services became the leading sector in terms of contribution to real GDP, about 65 percent. The major branches in the services sector are tourism (a major net foreign exchange earner) and financial services. Manufacturing industries contribute some 27 percent to real GDP and Turkeyʹs long‐term strategy targets an increase in production of high added value manufactured goods and services to accelerate the move to an export‐oriented, technology‐intensive production structure.

Turkey continues to liberalise its trade regime, with a focus on export promotion. The share of foreign trade of goods and services to GDP grew from 58 percent in 2003 to 64 percent in 2004 and foreign trade posted US$ 160 billion (+37.5 per cent) in 2004 and US$ 190 billion in 2005 (+18 percent). According to the World Trade Organisation, Turkey is fifth in the world in terms of export growth.

Export of goods has almost tripled in the past five years, up from US$ 28 billion in 2000 to a record high of US$ 76.7 billion (FOB) in 2005 despite depreciation of the dollar. Imports are also on the rise,

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posting US$ 105.7 billion (FOB) in 2005, led by household demand and businesses intent on securing more modern capital goods. For 2005, Turkey was ranked 23rd largest exporting country in the world and 14th largest importer.

Breakdown of Turkey’s manufacturing production and foreign trade points out the country’s comparative advantage in labour intensive industries. Added value in textile/clothing industries, leather, foodstuffs/ beverages, and tobacco represents nearly one third of overall added value in manufacturing. The share of manufactured goods in overall exports rose to 85 percent, composed primarily of textiles/clothing and machinery/transport facilities. Imported manufactured goods account for 65 percent of overall imports, the main categories being capital goods such as machinery and transport facilities and chemicals. This was made possible mainly by the 54.6 percent increase in private investment in 2004.

The EU is Turkey’s primary trading partner, with a market share of 55 percent in 2005. Germany is in first place, followed by Italy and the US. Turkey’s main suppliers in 2005 were Germany (11.7 percent), Russia (11 percent), Italy (6.5 percent), France (5.1 percent) and the United States (5.9 percent). Its main customers are Germany (12.9 percent in 2005), the United Kingdom (8.1 percent), Italy (7.7 percent), the United States (6.7 percent) and France (5.2 percent).

The EU is also Turkey’s main partner in the field of foreign direct investments. In 2004, approximately 78 percent of overall FDI inflows came from the EU, for average annual volume of 1 billion dollars and steady growth, up from US$ 2.8 billion in 2004 to US$ 9.7 billion in 2005. This was 2.6 percent of GNP and growth of 239 percent. The number of companies with foreign capital came to 11,685 including 2825 created in 2005. According to International Institute of Finance (IIF) estimates, Turkey could receive US$ 11

billion or more in FDI in 2006. The geographic focus for FDI is Istanbul and the nearby area of Marmara, where the major portion of large‐scale industrial projects is located. Other initiatives are found in coastal areas (Izmir, Antalya), generally relating to tourism. Antalya, the Turkish Riviera, is the tourism capital of the Mediterranean coast.

Authorities have set an objective to expand the ratio of total investment to GNI from approximately 22 percent in 2000 to 27 percent in 2023, with public sector share in total investment falling from 30 percent to 10 percent. Over the same period, public investment in education, health and R&D will rise and investment in energy, transport and communications are expected to remain at current levels until 2010. The government has decided to undertake an ambitious decentralisation process by transferring responsibility for expenditure to the special provincial administrations (81), cities and communes. Regional development agencies will be set up in the 26 areas newly created to coordinate regional infrastructure projects and local development initiatives.

On 1 January 2005, the Turkish lira was replaced by the New Turkish Lira by dropping six zeroes, i.e. 1 new lira is equal to 1,000,000 old lira, with new bank notes of 10, 20, 50 and 100 in circulation.

Risk rating

The main rating agencies upgraded their evaluation of country risk as follows:

Standard & Poor’s: BB‐ as of January 23, 2006

Fitch: BB‐ as of 6 December 2005

Moody’s: Ba3 as of 14 December 2005

Coface: B as of December 2004

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However, for Coface, the B rating under positive watch was downgraded to B in January 2007 for the following reasons:

The fall of the pound in May 2006 (more than 16%) and the significant rise of the interest rates (from 13.25 to 15%) decided by the Central Bank to fight inflation and reassure the markets, may cause a significant deceleration of the domestic demand and diminish growth. The fall of the pound penalises importers and borrowers in hard currencies;

A continued fall of the pound would affect in priority the private sector, whose debt will be increased. Restrictive budget policies and a sound reorganisation of the banking environment should better protect the State and the banks than at the time of the 1994 or 2001crisis;

The current account deficits reaches new records and the risk for volatile capital to withdraw rapidly is significant.

Key challenges

In spite of steady economic growth, certain imbalances such as a high unemployment rate for graduates and young people and a low proportion of working women continue to be of concern.

Approximately 95 percent of Turkish companies are small businesses with low productivity and technology levels. Prospects for development and modernisation are affected by limited access to credit and financing.

The country is highly dependent on imports of hydrocarbons.

The situation with Cyprus and the Kurdish minority, security issues and the role of the Army could in the long term weaken a currently stable political situation and make the accession of Turkey to the EU more difficult.

Strong points

Greater domestic and international confidence since the opening of adhesion negotiations with the European Union will stimulate strong GNI growth, projected at an average of 6 percent for 2006‐2007.

The government offers many incentives for capital investment and encourages regional development.

Globally, there are no restrictions on the ratio of foreign holdings and the requirement for minimum capital of US$ 50,000 to form a company has been removed.

Turkey has the support of the international community thanks to its exceptional geographic location. The 2005 financial support in the framework of the EU’s Pre‐Accession Economic Programme came to 300 million Euros and loans from the European Investment Bank (EIB) amounted to 3.6 billion Euros.

Strong fiscal performance has been the cornerstone of Turkey’s economic programme and public finances have improved considerably since the 2001 crisis. Progress has been made in the area of bank solvency and the quality of their assets has improved.

Thanks to the customs union with the EU, the Turkish economy has been integrated into a major economic block and this has stimulated the Turkish economy since the start of the liberalisation process. Turkey has opened its market to competition from EU and third party countries while obtaining free access to EU markets. The prospect of accession to the European Union is likely to deepen reforms in the years ahead, modernise the institutional framework, accelerate economic development, and enhance potential for growth.

The private sector is diversified and dynamic, adapting quickly to an unstable environment. It has experienced remarkable

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growth, even if the government continues to play a major role in the fields of industry, banking, transport, and communications. Modern production equipment is available in various sectors. There are more than 70 organised industrial parks (OSB) on 17,132 hectares and 11 technopoles.

The majority of the companies in Turkey are small businesses, but major family holdings such as Koç, Sabanci, Dogan, Zorlu and Dogus control more than 270 companies in virtually all sectors of the economy.

Labour is skilled, flexible and relatively inexpensive. Turks speak several languages, including French, which is taught at 10 bilingual secondary schools in Ankara and Istanbul as well as the French‐speaking University of Galatasaray in Istanbul.

The local market is keen on western know‐how and technology.

A consumer‐intensive middle class lifestyle is quickly taking hold.

Turkey has modest reserves of oil and natural gas but abundant proven reserves of lignite, borax, chromite, magnesite and marble. Mining and energy activities are booming and Turkey’s growth rate for total production of primary energy has been almost 5 percent per year and that of total final consumption approximately 4 percent per annum over the past three decades, expected to reach an average of 6.4 percent for the period 2000‐2010. The need for direct foreign investment in this sector is estimated at US$ 4.5 billion a year until 2010.

Thanks to its strategic geographic location, Turkey is an export platform with access to a market of almost a billion consumers, made up of:

Its domestic market of 72 million people, projected to reach 84 million by 2010

The 600 million inhabitants of the European market

The 250 million inhabitants of emerging markets in the Balkans (Bulgaria, Romania, Greece), the Caucasus (Azerbaijan, Georgia, Russia) and the Turkish‐speaking former Soviet republics of Central Asia (Kazakhstan, Uzbekistan, Turkmenistan)

The 160 million inhabitants of the Middle East’s expanding markets (Iran, Iraq, Syria) and North Africa.

According to the latest A.T. Kearney Foreign Direct Investment Confidence Index, an annual survey of executives at the worldʹs largest companies, Turkey jumped from under the top 25 to the 13th most attractive market in 2005. This sharp increase in the FDI confidence level was affected by launching of negotiations for full membership in the EU.

The Directorate General for Foreign Investments (GDFI) A new agency, Invest In Turkey, has been set up in late 2006 in order to ease the landing of new investors on Turkish land. This new structure will take over, step by step, the former marketing and servicing responsibilities of the Directorate General for Foreign Investments (GDFI, Treasury). A web site already exists at: http://www.investinturkey.gov.tr

An Investor Relations Office (IRO) has also been established under the Treasury (Secretariat of State based in Ankara) and is contributing to the efforts to foster and improve Turkey’s relations with international investors on a continuous basis. The primary objective is to enable constant information flow with respect to prevailing macro‐economic aggregates by providing reliable and accurate data while pursuing prudent investor relations with financial community. Web site: http://www.treasury.gov.tr/iro.htm

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So far, the GDFI has been acting as a one‐stop shop for major investments, offering tax exemptions and other incentives. Its main tasks include:

Providing full information on how to set up a business in Turkey

Advising on investment incentives, processing applications and issuing incentive certificates, in its capacity as sole governmental authorising agency in this area

Providing information on labour, infrastructure, trade, investment sites, Turkish legislation, and all other topics relating to Turkish business matters

Identifying investment sites on the basis of investor preferences

Providing guidance for administrative, legal, tax and labour procedures

Facilitating contacts and identifying suitable local partner counterparts

Assisting international investors to organise fact‐finding tours in Turkey

To attract greater foreign investment the government adopted new legislation regarding foreign direct investment under law N 4875 of 2003. This law stipulates that according to the law, there are generally no restrictions to FDI except for certain sectors ruled by specific laws.

Other institutions dealing with FDI:

Under Secretary of Foreign Trade: http://www.dtm.gov.tr/English/doing/iginvest/invest.htm

Union of Chambers and Commodity Exchanges of Turkey (TOBB): www.tobb.org.tr

Turkish Industrialistsʹ and Businessmenʹs Association (Tüsiad): www.tusiad.org.tr

International Investors Association of Turkey (Yased): www.yased.org.tr

Small and Medium Industry Development Organisation (Kosgeb): www.kosgeb.gov.tr

Foreign Economic Relations Board (DEIK): www.deik.org.tr Export Promotion Centre (IGEME): www.igeme.gov.tr Istanbul Chambre of Trade: www.ito.gov.tr The EU Turkish Business Centres (ABIGEM) are designed to

support Turkish small and medium enterprises (SMEs) by providing them with management and economic development services: www.abigem.org

How to invest in Turkey Turkish authorities recently took measures to improve the investment climate, under a new legal framework governed by law n°4875 of June 2003 replacing law n°6224 of 1995 on foreign investment. This legislation dictates that foreign investors be treated in a non‐discriminatory manner, with no limit on foreign holdings in corporate capital except in certain sectors such as media (for which the share of foreign holdings is limited to 25 percent) and air transport, telecommunications, maritime transport, harbour services, and processing of fishery products (limited to 49 per cent). Banks, insurance companies, and the mining sector are governed by legislation specific to these activities and a special permit is required to do business in these sectors.

Foreign investors can acquire land in Turkey under condition of reciprocity, but purchase of more than 30 hectares requires the prior authorisation of the Council of Ministers (law n°2644 concerning land registry). Trade in real estate remains limited to Turkish concerns. Turkish investors who want to invest more than 5 million dollars abroad must also obtain authorisation from the Under‐Secretary of the Treasury’s office.

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Legislation governing investment provides for all kinds of companies. There is no limit on capital holdings and management and licensing agreements no longer require prior authorisation from the Treasury. The right of foreign investors to international arbitration and protection against expropriation is recognised and international arbitration law n°4686 of July 2001 provides for recourse to international arbitration for dispute settlement in the area of public utilities. Other major innovations have strengthened this legal framework and thus improved the business environment. Law n°4817 of March 2003 governs work permits for foreign workers and simplifies the procedures for recruitment of foreign personnel. Moreover, Parliament recently adopted a law simplifying the process for setting up a company. Today it is possible to create a business in 24 hours (compared to 53 days previously) by registering at the trade registry, with only three authorisations required instead of 19. Tax rates are expected to drop in 2006 to 20 percent, down from 30 percent.

In the framework of privatisation, the Turkish government treats FDI and local investments in the same manner, even if restrictions apply to some strategic sectors. Foreign investors also get equitable treatment for incentives such as reduced corporate income tax, exemption from VAT on machinery and equipment bought locally or imported for the needs of the investment initiative, loans at a subsidised interest rate for research and development, etc.

Except for tax cuts on profits, which are granted automatically, investors must get a “certificate of investment” from the Treasury Department in order to be eligible for incentives. The duration and level of exemptions and other assistance vary, on the basis of geographic and sectoral factors and the amount of the investment. Financial legislation governs portfolio investment at the Istanbul Stock Exchange (ISE).

Turkey represents a large market of 72 million consumers. It has been negotiating its adhesion to the European Union since 2005. A customs union with the EU has been in effect since January 1, 1996, dealing with industrial and manufactured agricultural products. Industrial products of European origin or from EFTA countries enter Turkey free of customs duties. It also applies to EU common customs tariffs with respect to third‐party countries, except for a number of products considered “sensitive”. On average, custom duty on imports from third party countries (which are not members of the EU) is charged at 5 percent. The protection rate in 2005 was 4.20 percent for industrial products and 56 percent for agricultural products, which are subject to high tax rates (135 percent on sugar, 145 percent on green tea, 150 to 170 percent on certain dairy products and 225 percent on meat).

Customs duties are calculated on the basis of CIF prices. The average VAT rate is 18 percent on industrial products, on top of customs duties. Equipment and machinery are entirely exempt from customs duty and VAT, while there are special rules for import of foodstuffs. To export products and services, companies based in Turkey must be members of one of the thirteen export associations. The requirement also holds for imports. There are a number of export incentives and aids, such as Eximbank credit and export promotion aid. Additional tax cuts and customs incentives are granted to companies operating in any of the country’s 21 offshore zones. Activities allowed in these zones are production, purchase‐sale, assembly‐disassembling, maintenance‐repair, banking, insurance, leasing, office rental, etc.

Law n°5084 of February 6, 2004 introduced new tax incentives. The law applies to private individuals and corporate entities that obtained a license to operate prior to entry in force of the law; they will continue to take advantage of tax exemptions for as long as their licenses remain valid. Employees are exempt from income tax

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until 2009. All income tax exemptions remain valid until Turkey accedes to the European Union.

Turkey is a member of the World Trade Organisation (WTO). Aside from negotiations with the EU, Turkey has signed the Black Sea Economic Co‐operation Pact (BESC) as well as free trade agreements with EFTA states and it is a member of the Economic Cooperation Organisation (ECO).

To date, Turkey has signed 18 free trade agreements, with: the new EU members, EU applicant countries (Croatia, Bulgaria and Romania), Eastern European countries (Macedonia and Bosnia) and a number of Mediterranean countries (Israel, Morocco, Tunisia, Syria and the Palestinian Authority). Negotiations are under way with other Mediterranean countries. Turkey also signed a co‐operation agreement with the Gulf Cooperation Council (GCC) in 2005, targeting creation of a free trade area with the six monarchies of the Gulf region. Turkey has also signed 66 bilateral agreements for the promotion and protection of foreign investment. It has been a member of the International Centre for Dispute Settlement and the Multilateral Investment Guarantee Agency (MIGA) since 1987. In 1991, it adhered to the Convention for the Recognition and Execution of Foreign Awards and the European Convention on International Commercial Arbitration.

Finance & banking in Turkey The Turkish banking environment helped attract more than US$ 6 billion in foreign capital in 2005. The sector needs to grow at 8 percent over the period 2005‐2020 with assets of US$ 790 million in order to correct weak financial intermediation and private sector credit corresponding to just 21 percent of GDP.

There were 47 banks operating in Turkey as of January 2006, compared to 50 in 2003: 35 commercial banks with total assets of US$ 296 billion and US$ 111.7 billion in cash loans. The five largest

banks have a market share of more than 60 percent, the foremost being the public agricultural bank Ziraat Bankasi, with 22 billion dollars in loans. After the financial crisis of 2000‐2001, an extensive consolidation plan, the Banking Sector Restructuring Program, was started by the BRSA, based on the following main actions: (1) restructuring of state banks, (2) prompt resolution of SDIF banks, (3) strengthening of private banks, and (4) strengthening of the regulatory and supervisory framework by setting up a supervisory authority for the regulation of banks (BRSA). Ziraat Bank and Halk Bank, the two main State banks, were restructured and recapitalised in 2004 in preparation for their privatisation.

The legal environment of Turkey’s financial market, altered and unified by adoption of law n°5387 of 1 October, 2005, will be addressed in a second phase. Responsibility for regulation and monitoring of financial companies, leasing and factoring companies, and loan co‐operatives was transferred to the agency for the regulation and monitoring of the banking environment (BDDK). Minimum capital equity requirements for banks were raised by 50 percent and governance criteria were strengthened. The BRSA and the Central Bank are preparing a new framework of requirements for capital equity and the Cooke ratio based on the criteria of Basle II. Under the terms of this legislation, any bank operating in Turkey must be a joint stock company, with minimum capital of 20,000 billion Turkish Lira (approximately US$ 1.42 million). Foreign banks can operate in Turkey either by establishing branches or subsidiary companies or by entering into joint ventures with existing banks. It is not currently possible to set up offshore banks.

With successful implementation of the economic program, increased confidence, political stability, and prospects for EU accession, foreign bank participation in the Turkish banking system has after many years become a reality. Major mergers and

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acquisitions took place in 2005‐06, increasing foreign participation from 3.6 percent of total credit to 13.4 percent in 2005.

This trend is likely to continue in the years to come. Small and medium size banks, which have higher intermediation costs, will need more foreign partnerships to increase their financial base and compete with the sector’s giants. Merrill Lynch announced its intention to open an investment bank. Foreign investments are also expected in the public sector and the government is committed to privatising three state owned banks. In November 2005, Vakiflar Bankasi was offered to the public by IPO, raising US$ 1.27 billion, two thirds from foreign institutional investors. It is also expected to yield 30 to 40 percent of its shares in 2006 by public offer. Privatisation of the Ziraat Bank and of public shares in the HalkBank has been entered in the privatisation program. This sale will be conducted using the block sale method.

Established in 1985, the Istanbul Stock Exchange (ISE) is one of the most important emerging stock markets, with trading in a wide range of securities such as stocks, exchange funds, government bonds, Treasury bills, money market instruments, corporate bonds, and foreign securities. Market capitalisation went up from 26.5 percent of GDP in 2003 to 30.6 percent of GDP in 2004 and 45 percent of GDP in 2005, worth US$ 162.8 billion. 304 companies are quoted, including 282 on the national market where the main stocks are posted. 100 companies selected from among the listed companies on the national market make up the ISE National 100 Index, the main index; other indexes are IMKB‐50 and IMKB‐30. The bond market is dominant in Istanbul, in fourth place worldwide in terms of annual volume traded on the stock exchange. The bond market lists only government debt securities, representing US$ 246.8 billion at the end of 2005, but only part of domestic debt (US$ 182.4 billion) is negotiable (US$ 126.2 billion). The ISE International Market (ISE IM) has been established in the ISE International Securities Free Zone, operating in a tax‐free

environment. The ISE International Market’s objectives are to encourage the flow of international capital to the ISE and to provide a transparent and secure trading environment for securities issued on international markets. In an environment of entirely free mobility of funds, prices are determined freely and competitively, thereby raising the liquidity and diversity of investments.

A new long‐term financial market for raw materials and products opened in February 2005 (VOB). At one daily session, two long‐term contracts for raw materials (cotton and corn) and six contracts for financial products were handled on this market.

Investment funds have been very dynamic since their creation in 1986, on a growth path thanks to the status of non‐resident investment funds (NRIF). At the beginning of 2005, Turkey counted 255 investment funds with a total portfolio of 15 billion Euros (approximately 6 per cent of GDP) and 84 pension funds holding credits of 258 million Euros.

Weak development of the insurance sector is an impediment to the development of local institutional investors: in 2004 direct premiums paid to 48 insurance companies amounted to just 1.53 percent of GDP (compared to 7.9 percent in Europe and 3.1 percent in emerging markets). But ongoing reform of the pension system, in particular the creation in February 2003 of private pension funds and adoption of new accounting legislation is likely to have a positive impact in stimulating the market. By the end of 2005, 41 percent of the Turkish private insurance sector was controlled by foreign companies.

In spite of a dynamic economy, venture capital is not very well developed, limiting the growth potential of young innovative companies and slowing down the emergence of a knowledge‐based economy. A mortgage debenture market was to be created in 2005‐2006 to meet the needs of strong demographic growth and plans

Invest in Turkey

were in place to build 300,000 residences a year. Legislation reforming how mortgages are regulated and allowing for creation of a mortgage debenture market is in the ratification process.

Telecommunications & internet in Turkey The telecommunications sector has seen major structural change toward liberalisation, in particular since 2004 when the fixed telecommunications network was opened to competition, previously the monopoly of the state‐run operator Türk Telecom (TT), and an independent telecommunications regulatory body, the Telecommunications Authority (MT) established. New licences were granted to 16 suppliers of data transmission services in fixed telephony. Further steps towards liberalisation and breaking up of the monopoly were taken in 2005‐06 by sale of Türk Telekom to Oger Telecom, a subsidiary of the Saudi group Oger, for US$ 6.55 billion. Vodafone repurchased Telsim, the second largest mobile phone operator, for US$ 4.55 billion. The Turkish telecommunications network continued to grow, currently ranked the 13th largest market in the world and fifth in Europe. Sales turnover for fixed telephony amounted to US$ 5 billion in 2004, expected to reach US$ 9 billion in 2010. In practice however, Türk Telekom has a quasi‐total monopoly of the market, with 19 million subscribers.

With nearly 40.4 million subscribers in July 2005 and a penetration rate of 58 percent, the mobile phone market is growing faster than fixed telephony and Turkey in this regard is an Eldorado for mobile operators. TT is also present in the sector through its subsidiary company Turkcell (28.7 million subscribers as of March 31, 2006), followed by Telsim (8 million subscribers) repurchased by Vodafone, and Aria (4 million subscribers), in which Telecom Italia holds a 49 percent share.

Turkcell provides high quality wireless telephony services throughout the country, covering 100 percent of cities with more than 10,000 inhabitants. Turkcell is quoted on the NYSE (New York Stock Exchange). It also provides international cellular services through Fintur in Azerbaijan, Georgia, Kazakhstan, and Moldavia, which had nearly 6.4 million subscribers at the beginning of 2006 for the third consecutive year. Turkcell was classified 14th among the 100 most powerful information technology companies by Business Week Tech magazine.

There are 24 satellite platform operators. Internet use is also developing very quickly, in particular since introduction of cable networks and broadband services such as ADSL in 2001, growing from 6 million users in 2003 to 10 million in 2005, with a penetration rate of 13.9 per cent. Turkish Telecom has decided to invest nearly US$ 800 million over the next five years to improve services. Turk Telecom’s cable television services were transferred to Turksat A.Ş. (Turksat), the public company in charge of satellite services, which has exclusive rights in this sector.

The major innovations planned for 2006 relate to adoption of a law on electronic trade and electronic signature. Turkey must still align its legislation to European standards with regard to electronic trade and services with conditional access. Similarly, cable telephony and wireless fixed telephony (broadband Fixed Wireless Access) were authorised to broaden competition in telecommunications infrastructure. Local loop unbundling, which will facilitate competition, was legally introduced on July 1, 2005. Opportunities exist in added value services such as Push to Talk (chat), 3G telephony and other new cellular technologies like MMS (Multi‐media Messaging Service) and MVS (Mobile Video Streaming).

Useful sites:

Telecommunications Authority: www.tk.gov.tr

The 2006 Telecommunication Plan is available online at:

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http://www.tk.gov.tr/Yayin/Is_Planlari/tk_2006.pdf

Turk Telekom website: www.turktelekom.com.tr

Turkcell website: www.turkcell.com.tr

Telsim website: www.telsim.com.tr

Business opportunities in Turkey Classified as the 20th biggest economy in the world by the World Bank in terms of income, with a population of 72 million and a geographic location that provides access to a market of almost 1 billion consumers, Turkey has many advantages thanks to a solid industrial base and prospects for growth in many fields. Its geographic location makes it a country of transit and an export platform for international trade in oil and gas, making the country an “energy hub”. Thanks to the many plans for construction of oil and gas pipelines with neighbouring countries, Turkey could become the fourth largest source of energy in Europe, after Norway, Russia and Afghanistan.

Several sectors have been liberalised (transport, electricity, telecommunications), independent regulation authorities have been created, and these reforms have helped the in‐depth economic modernisation process. Banking and financial reform is under way, with restructuring of the main establishments (788 subsidiaries of public banks were closed), recapitalisation of the two largest public banks and some private banks, and adoption of international prudential standards. Although State intervention has been reduced considerably since 1985, public companies still control five percent of the non‐agricultural sector.

Turkey is committed to its privatisation plan for the public sector, but privatisation efforts proceeded slowly, mainly due to the multiple economic crises and adverse international conditions. Between 1986 and October 2003, revenue from privatisation came

to about US$ 11.2 billion, including US$ 1.3 billion from foreign investors. The breakthrough in privatisation finally came in 2005, when implementation generated US$ 8.2 billion. With hydroelectric power plant deals and the sale of companies managed by SDIF (the Savings Deposit Insurance Fund), the government raised US$ 29.8 billion from the sale of state assets in 2005. Foreign investors showed their interest in the Turkish market by participating in key privatisations such as the Tüpras oil refinery and the Erdemir iron and steelworks. The Saudi group Oger Telecom acquired 55 percent of Türk Telekom with a US$ 6.5 billion bid, one of the largest deals in 2005. Another important deal was the Galataport tender and Iskenderun port tender secured by the PSA‐Akfen consortium with an US$ 80 million bid. The same consortium was also awarded the tender to manage the port of Mersin, Turkeyʹs largest, with a bid of US$ 755 million. A public offering of 34.5 per cent of Petkim shares was completed in mid‐April 2005, raising US$ 288 million.

The list of privatisations is available on the privatisation administration’s website:

http://www.oib.gov.tr/portfoy/portfolio_general.htm

One of the Turkish economy’s strengths is its dynamic small businesses and SMEs, which have the ability to adapt quickly, particularly in agricultural and textiles/clothing. Turkey is the fourth largest supplier of clothing and tenth largest supplier of textiles in the world, the second largest supplier of clothing and fifth largest supplier of textiles to the EU. Despite local investment capacity, more materials and equipment will be required to boost output and profits in order to be ever more competitive in world trade and to meet the challenge of adhesion to the European Union. Furthermore, the country’s economic growth is creating new downstream investment opportunities for primary activities, for example in agrofood industries and agriculture.

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Tourism

The tourism sector plays an increasingly important role in the economy. From 1990 to 2004, the number of tourists increased by 280 percent to 17.5 million. Tourism revenue increased by 380 percent to US$ 12.12 billion, making the country the eighth most popular tourist destination in the world, after China. The target is to welcome 50 million tourists annually by 2010.

Nearly 5 percent of GDI is currently generated by this sector, which represents nearly 15 percent of employment and total investments of US$ 35 billion for accommodation capacity of 450,000 beds meeting international standards and nearly 1 million beds in the guestroom category. Tourism is well developed, in particular along the Mediterranean coast, in Istanbul and in the central portion of the country (Cappadoce). Thanks to its natural resources and historical vestiges, the country has strong potential for further development. With exceptional coastlines as well as archaeological and cultural sites, Turkey can exploit two categories of tourism: mass tourism interested in a seaside holiday and cultural tourism focused on sightseeing. Business tourism is also on the rise in Turkey, with six major conference centres in Istanbul hosting many international events every year.

Foreign investment in tourism amounted to US$ 3 billion in 2004. According to the tourism organisation TYDʹS, 15 percent of beds (65,000) are managed by foreign capital. German companies are the most active in this sector (Steigenberger, TUI, Neckermann and Club Robinson), followed by Swiss companies (Kuoni), French (Accor, Club Mediterranée) and Anglo‐Saxon (Sheraton, Hilton, Ramada, Conrad, Hyatt Regency, Inter‐Continental and Holiday Inn). The Japanese are also present, with significant holdings in the Swisshotel. The Canadian group Four Seasons, which already has a five‐star hotel in Sultanahmet (Istanbul’s historic district), hopes to build a new hotel near the Ciragan Palace.

Major deals concluded lately include the sale of the Istanbul Hilton hotel for US$ 255.5 million, Cyprus Turkish Airlines for US$ 33 million, and the Büyük Efes and Büyük Ankara hotels for US$ 121.5 million and US$ 36.8 million respectively. The Tarabya and Bursa Çelik Palas hotels are on the 2006 agenda.

After several lean years because of tight fiscal policies, the sector expanded anew in 2005 (+21.5 percent vs. +4.6 percent in 2004), driven by growing real estate and residential development thanks to relatively low interest rates and policy that promotes housing loans. Investment came to US$ 32.8 billion in 2005, 60 percent of overall investments. Growth and investments were led by the private sector, up from US$ 8.9 billion in 1998 to US$ 21.2 billion in 2005. Public expenditure in the sector rose from US$ 8.6 billion in 2004 to US$ 11.5 billion in 2005. The government has projected that in the next five years the national housing gap will reach 1.5 million. With an economy in full expansion and rapid urbanisation, there is a considerable need for construction of new factories, commercial buildings and offices, shopping centres, malls and shops. Development of tourism continues to generate new construction projects.

Turkish building firms are active in Central and Eastern Europe, Russia, the Caucasus and the Middle East and the country is a major supplier of building materials and construction in the region. More than 5000 companies produce building materials and over 100,000 companies are involved in the sector. The market for building materials is the third largest industrial sector in the country, after agrofood and textiles, accounting for 10 percent of overall added value and 11.4 percent of total exports in 2005.

Turkey is a major producer of cement, iron and steel, frames, tiles, PVC, polyethylene, glass, ceramics, ceramic components, and enamel. Turkey has 57 private cement factories (39 integrated

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factories and 18 packing and grinding plants) turning out 67 million tons of cement and 39 million tons of clinker, up from 38.8 million and 32.8 million tons respectively in 2004. Turkey is the 12th world cement producer and the third largest in Europe. It is the second largest exporter of cement in the world and the largest in Europe. Sabanci, Oyak and Rumeli (currently being restructured) are the three main cement manufacturers in Turkey. Exports of cement amounted to 8.2 million tons in 2004, with 66 percent in terms of volume going to Iraq, Italy, Spain and the United States. Exports to Iraq increased from 698,000 tons in 2003 to 2.1 million tons in 2004.

The financial institution FinansInvest is planning to invest some US$ 15 billion in residential projects in the next few years, primarily with foreign money. Retail infrastructure has undergone considerable development over the past decade. The number of modern retail outlets (hypermarkets, supermarkets, discount stores and shopping centres) has been soaring and this has attracted many foreign investors and pension funds (mainly from the US): Cgi (a Commerzbank real estate investment fund), ECE Turkey (German), MDC Turk Mall (Dutch), General Growth (USA), Sanatorium (UK), Pirelli Real Estate (Italy). Other foreign investors in the retail sector are Emaar Properties (Dubai) for US$ 10 billion, Hawthorn Hotels (USA), General Growth Properties (USA), Panargo Construction (Dutch), Commerzbank Grund Investment (Germany) for US$ 652 million, International Dubai Properties (Dubai) for US$ 5 billion, MDC Turkmall (US) for US$ 1.2 billion. The Turkish retail sector is in a growth phase of the business cycle and the outlook for shopping malls appears more promising, with relatively higher yields (12‐15 percent) than in major European cities.

The retail sector

The modern retail sector has a bright future in Turkey. AT Kearney’s Global Retail Development Index ranks Turkey as the eighth largest developing market in the world in 2006 and sixth in the world in terms of the sector’s attractiveness, with a score of 59 on a scale of 100 to 0.

There has been sustained growth in retail trade since 1990 and future growth is expected to grow at a higher rate than the economy as a whole. According to research carried out by Tansas regarding food distribution channels (valuated at US$ 24 billion), modern forms of retailing accounted for 31 percent in 2003, representing turnover of US$ 7.4 billion, approximately 3.1 percent of GDP. According to the same source, the market is expected to increase to US$ 28 billion in 2010, with a 41 percent share for organised distribution channels.

The Turkish market has seen an influx of foreign retailers and brands since the early 90s. The French group Carrefour has 12 hypermarkets under the Carrefour brand name, 7 supermarkets under the Champion brand name, and 303 discount stores under the Dia brand name. Carrefour’s local partner is the second largest Turkish conglomerate, Sabanci Holding, holding 40 per cent of Carrefour’s subsidiary company. The German firm Metro is present in Turkey with 22 stores under three brand names: Metro Cash & Carry, Real Hypermarket and Praktiker. Kipa, founded in 1992 by a group of some 100 Turkish entrepreneurs, has become a regional brand name, opening five hypermarkets totalling 38,000 m² with a market share of 30 percent. Kipa sold 50 percent of its capital to the English firm TESCO in 2003. The Swiss chain Migros (controlled by the Turkish group Koç) has 507 stores with a total surface of 424,000 m², 62 of which are located in Russia, Kazakhstan, Azerbaijan and Bulgaria.

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Several mergers and acquisitions took place in 2005. In May, Carrefour bought the Gima chain (including its Endi discount stores) belonging to the Fiba Group (Finansbank). In July, Migros acquired 71 percent of capital in Tansas from the Dogus Group.

Hard discount is the fastest growing form of retailing, especially in Istanbul. There are four major brands: BIM, held mainly by three investment funds (Bank of America International Investment Corporation, Merrill Lynch Global, and World Wide Ltd.), leader in this segment with more than 800 stores, Sok (Migros), and Dia (Carrefour). For You Bakim Urunleri Magazalar, which has 55 stores specialised in personal care and beauty products, was repurchased at the beginning of 2006 by the American investment fund AIG Capital Partners, Inc. (AIGCP).

Agricultural output has increased over the decades, ranging between US$ 40 and 43 billion in recent years. According to the Food and Agriculture Organisation, Turkey ranks among the top 10 countries in terms of per capita fruit and vegetable production. Though a net exporter of fruits and vegetables, Turkey’s imports have grown steadily since the 80s, amounting to 5 percent of overall imports in 2004. Production is currently equal to about 40 per cent of EU‐25 fruit production and 20 per cent of vegetable production. The sector has also become an important resource base for many export‐oriented industries and the share of agro industrial products in total exports is around 6 per cent. Since 2001, Turkey has been reshaping its agricultural sector in preparation for EU membership and in line with its commitments to the IMF.

The agricultural reform programme focuses on creation of a rural development strategy targeting modernisation of subsistence and semi‐subsistence farming and ensuring commercially viable structures. Harmonisation of Turkish agriculture with the CAP (Common Agricultural Policy) is a priority in Turkish‐EU relations.

Turkey will have to adopt 17 laws, 211 regulations, and circulars in order to adjust its agricultural system to that of the EU.

TIGEM (state farms) opened its medium and smaller size farms to the private sector at the end of 2001. The first deal was a joint venture between TIGEM and Dimes (top milk and fruit juice producer) in 2003. 22 farms involving 491 million sqm are slated for foreign involvement. TIGEM is open to proposals and suggestions from local and foreign investors for all of the state farms. Thus, TIGEM farms are likely to offer even greater opportunities for foreign investors, especially for contract farming with farmers in the vicinity.

The Southeastern Anatolia Project, a development initiative called GAP, has been launched. This is Turkeyʹs largest regional development scheme, expected to make the region a major exporter of a wide variety of agricultural products. Exports from the region rose from US$ 427 million in 1994 to US$ 1.9 billion in 2005 and given that it is a gateway to the US$ 200 billion Middle East market, this undertaking is likely to offer many opportunities for investors. It involves US$ 32 billion in investment, of which over US$ 17.8 billion was made at the beginning of 2006. US$ 8 billion is needed for irrigation alone, offering profitable opportunities for investors in this field. The 196 km Sanliurfa‐Gaziantep highway is planned for completion in the near future, linking the region to Mediterranean ports.

The agrofood sector, very disparate, needs investment in R&D to bring quality and sanitary conditions up to world standards. Restructuring and regrouping of land that has been parcelled out (90 per cent of farms are less than 10 ha) are also necessary to facilitate mechanisation of production to boost output, since for Turkey to accede to the EU it will need to align to the common agricultural policy. Foreign investors are eager to circumvent prohibitive tariff barriers and develop joint ventures in order to

Invest in Turkey

modernise some underdeveloped or untapped sectors with high growth potential, particularly frozen products, milk and baby food. The leading French food manufacturer Danone, working in association with the Sabanci conglomerate to develop its dairy products under the Tikvesli brand, is a good example. The Swiss group HERO has set up a joint venture with ULKER, the largest consumer foods company in Turkey, to produce baby food under the brand Ulker Hero Baby.

The health sector is slated for privatisation, but a substantial portion of health care services is still provided by the public sector and 80 percent of total capacity is still held by public agencies. Turkey is pursuing the objective of improving health care in terms of both coverage and quality, through greater reliance on private sector funding and an increase in the efficiency of the public system. Investment incentives and the introduction of private health insurance in 1990 played an important role in accelerating progress in the sector. Hospitals can import all required machinery and equipment listed on their incentives certificate free of customs duty and related charges and they are eligible for 100 percent exemption from corporate tax. The private sector has begun to take advantage of the incentives system in recent years. With increasing demand for private health care services, the number of private hospitals has grown steadily since 1993, up from 141 in 1995 to 295 in 2005. Some of the foreign entities involved are the Metropolitan Florence Nightingale Hospital/American Cancer Centre (which has established ties with Memorial Sloan‐Kettering) and Johns Hopkins (which has established an alliance with the Anadolu Group). IFC has recently released long‐term loans to the Acıbadem Healthcare Group in Istanbul and Mesa Group in Ankara to finance their expansion and construction of three hospitals. An important new trend is patients from European and Middle Eastern countries travelling to Turkey for treatment in private sector facilities. In

addition, there have been instances of patient exchange on a private basis with various European countries including the Netherlands and UK. The most promising areas include ophthalmology, cosmetic surgery, and dentistry.

The market for medical equipment is estimated to be growing at 12‐14 percent annually, reaching some US$ 3 billion in 2005. Growth has been fuelled mainly by increased imports rather than production, which exceeded US$ 500 million in 2003. Turkey relies on imports to meet a large portion of its sophisticated medical equipment needs and the general trend is for an increase in both imports and exports.

Industry is fragmented, with over 300 manufacturers and some 1500 importers, 350‐400 of which can be classified as medium scale, the rest being small businesses. Production generally focuses on low‐technology products and artificial body parts, most of which are exported. The majority of world manufacturers are present. The United States is the main supplier with a market share of 30 percent, followed by Germany with 20 percent and France with 5 percent. Japan’s market share has been growing steadily since 1990, in particular for radiology and electronic equipment, securing 17 percent of the medical imagery market in 2003. The distribution of market shares could evolve in favour of European companies, since EC marking is compulsory for imported medical equipment. The Turkish pharmaceutical market was estimated to be worth US$ 6.6 billion in 2003.

The textiles industry was one of the first industries established in Turkey. The export oriented economic policies of the mid‐1980s have been the main impetus for development. Low labour costs, a skilled and highly flexible workforce, cheap raw materials (including home grown cotton) have been other factors contributing to the Turkish textile and clothing industry’s solid

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performance. Turkey figures prominently in global trade in textiles, accounting for 3 percent of world exports of textiles/clothing and a local industry that is the fourth largest clothing supplier and tenth largest textile supplier in the world and second largest clothing supplier and fifth largest textile supplier to the EU region, according to WTO sources. Two segments dominate Turkey’s textile and clothing industry: the spinners and weavers that use high quality domestic raw materials to produce textiles. These firms maintain high market standards through their original designs and apparel manufacturers use a combination of domestic and imported cloth to produce finished non‐branded goods. This includes non‐branded firms that market their products through third party retail chains, with non‐branded items making up the majority of the industry’s domestic and export sales. As regards the industry’s technology level, the textile and clothing industry is an outward oriented industry, using modern technology and competing on export markets.

The sector accounts for about 7.8 percent of GDP, 19.9 percent of industrial production, 18.4 percent of manufacturing industry production, and 28 percent of overall Turkish export earnings. (Source: Istanbul Textile and Apparel Exporters’ Association.)

Knitted apparel is the leading product group in textile and clothing exports, accounting for 51 percent of the value of Turkey’s overall exports. Woven apparel accounts for 35 percent and other manufactured articles for 14 percent. Over 90 percent of overall textile and apparel, imports are fibres, yarns and fabrics, the remainder being ready‐made garments and other articles. Turkey is also among the leading importers of textile and clothing machinery, spare parts and chemical agents. Average imports of these items exceed US$ 1.7 billion annually. The EU countries are the main traditional markets, with EU 15 share of total Turkish exports of textile and clothing industry posting about 63 percent.

The industry counts 40,000 companies, with only 337 foreign companies employing more than 12 per cent of the population. Subcontracting is very well established, especially for a number of international buying offices, trading houses and major retailers and department stores like Marks & Spencer, GAP or H&M…

Despite the fact that Turkey will face greater competition in textile and clothing industries after quota elimination in 2005, Turkey still has great potential in this industry thanks to the advantages of geographic location, raw materials production and trained workforce. In the medium term, with decreasing lead times, better quality/price ratios and creation of brands, Turkey will continue to be one of the most competitive textile and clothing industries in the world. However, restructuring is needed to improve quality, management and marketing skills, logistic performance and certification. Foreign investment can play an important role in increasing product quality and institutional capacity.

A report called Roadmap for 2010 sets targets of US$ 67.5 billion for total demand, US$ 34.8 billion for exports and US$ 32.7 billion for domestic demand by 2010. The report recommends that Turkey reduce the share of subcontracted production in total textile production, reduce the share of simple/ordinary products in overall subcontracted production & maximise the share of medium‐high products in subcontract production, sell medium‐high fashion merchandise under global Turkish brand names and increase the share of such products to half of overall exports by 2010. The report also recommends that marketing and public image be improved, notably by creating ten international brands over the next ten years. In this framework, the Turquality label has been created to support the development of 15 companies and three designers in the sector.

Electronics and information technology sector

2005 posted a record high level of foreign investment in telecommunications, with three major deals worth US$ 14.4 billion.

Invest in Turkey

Several private firms have obtained licenses for the introduction of new telecommunication services and over 40 Turkish private sector companies have obtained various licenses, including 44 long distance telephony service provider licenses. Others are in the process of signing an interconnection agreement with Turk Telekom. The demand for telecom equipment from these companies and from Turkcell, Telsim and Aria will be growing significantly. This is still an attractive market, with a mobile penetration rate of only 55 percent at this time; expected extension of 3G services represents considerable business potential. The number of mobile subscribers increased from 34.4 million in 2004 to 43 million in 2005, expected to reach 51 million by 2006. Although about half of the market is longstanding, the duration for model changes has come down to 1.8 years. This, together with a young and growing population and the steady rise in national wealth, has placed Turkey at the top of the list of attractive sites for investment in the telecommunications industry.

The market for hardware is expected to follow the same strong development path. Many opportunities exist to supply fibre‐optics networks, ADSL, VoIP and Wireless Local Loop networks. 3G telephony must also be launched shortly. Türk Telekom is the fixed operator of telephony in several neighbouring countries, with strong growth in particular in Iraq where existing networks urgently need to be improved.

The ICT market was estimated at a total of US$ 17.7 billion in 2005 and the Turkish information technologies market valued at 4.85 billion. With more than 6 million computers, sales continue to generate high earnings, but Turkey still has a very low PC ownership ratio, around 10 percent. There remains considerable potential in terms of consumption of technology products, not only computers and accessories. Applications for digital signature will be required in the future, as provided for under new legislation. The government continues to develop its programme to connect

administrations and some US$ 6 to 8 million in investments will be needed to implement the e‐government project.

Although Turkey has a relatively large ICT market, ICT production is low. Most inputs such as hardware, software and computer equipment are imported and the high‐skill IT base in Turkey tends to be used by multinationals as an assembly shop. There is no manufacturing of the principal components of computers: mainboard, hard disk, RAM, graphic card, processor, monitor, mouse, keyboard and case; local manufacturing activity is limited to assembly. There are long‐term prospects for Turkey to become a power in export of software. The current market share for software is 14 percent, far below worldwide averages. Thus, software is a strategic growth segment for IT sector exports.

Energy market

Turkish hydrocarbon production is low and the country’s proven reserves limited. There is a major deficit in the balance of energy for hydrocarbons, with a dependency rate of 91.6 percent for oil and 98 percent for natural gas. Energy consumption is growing rapidly in the wake of demographic growth and economic development. The Turkish government estimates that electricity production will reach more than 160,000 billion kWh, 500 million kWh to be imported and 2152 million kWh exported. Total demand is expected to reach more than 240,000 billion kWh by 2010. The country thus needs an additional generating capacity of 54,000 MW by 2020. Turkey has no nuclear thermal power stations but it has had an experimental engine (250 kw, operational type TRIGA II) at the Technical Institute of Istanbul since 1979. A radioactive waste processing plant has been in operation since 1989 in Ckmece. Turkey recently took up old plans to develop nuclear energy generating capacity planning through three nuclear power plants (1500 MW each) for total nuclear capacity of 5000 MW by 2020.

Invest in Turkey

Hydrocarbon consumption will also grow for at least 20 years, more particularly gas for the production of electricity. But because of the priority given over the long term to hydroelectricity, coal, lignite and to a lesser extent renewable energies (including development of solar energy), the share of hydrocarbons in overall energy consumption is expected to decrease sharply for oil and stagnate for gas.

Turkey embarked on liberalisation and deregulation of the energy sector in 2001. Two laws were enacted (Electricity Market Law n°4628 and Natural Gas Market Law n°4646) to end the state’s monopoly of electricity and natural gas. This was followed by a series of other laws governing electricity market licenses (2002), the oil market (2003) and renewable energy (2005). An independent regulation authority, the Energy Market Regulatory Agency (EMRA in English, EPDK in Turkish) was set up in September 2002, mandated to monitor and supervise the market and to grant licences.

According to law n°6326 governing oil activities, foreign companies can invest free of restrictions in the marketing and sale of petroleum products. They can also invest in exploration and prospection as long as these activities are not controlled or held by a foreign State, but this restriction can be waived by the Council of Ministers.

Oil related activities can be carried out via companies legally constituted under Turkish law or local subsidiary companies set up under foreign law. It is necessary to obtain authorisation from the Council of Ministers to invest in refining, pipeline transport, and storage. Foreign investment is encouraged, in particular for the construction of next generation plants to create the additional capacity needed. Investment needs in the energy sector for the 2005‐2020 period have been estimated by the Ministry of Energy and Natural Resources (MENR) at US$ 129 billion.

Starting in 2006, authorities plan to sell approximately 16,000 MW of State‐owned thermal and hydro capacity. Considered as major privatisation tenders involving thermal and hydro power plants, these plants will be grouped in six lots. These auctions, including Yenikoy and Kemerkoy (the largest power plants in Turkey), are likely to attract the interest of international bidders.

Opening up of the gas market began in 2002. Other texts were adopted relating to tariffs, grid systems and distribution, infrastructure, services and installations. Lignite mines have been opened to the private sector based on a royalty system.

Turkey has laid 3177 km of gas pipelines and 3562 km of oil pipelines (2004). As a transit country/energy hub between East and West, it has developed a strategy of energy corridors. Indeed, Turkey is in proximity to 70 percent of world energy resources and a regional centre for the storage and transport of oil and natural gas. Turkey is supporting implementation of pipeline projects to transport hydrocarbons produced in the Caspian.

Meanwhile the EU has been encouraging Turkey to provide a safe transit centre to help meet the EU’s future energy requirements. It is also highly interested in establishing new supply networks through Turkey. The EUʹs dependency on gas imports, presently 41 percent, is expected to correspond to some two thirds of total gas demand by 2020. According to an EU study, 70 percent of Europe’s incremental gas demand can be supplied via Turkey and the U.S. is interested in reducing its dependency on Persian Gulf oil supplies and preventing supply disruptions. Turkey could become Europeʹs fourth‐largest source of energy supplies after Norway, Russia, and Afghanistan.

The Directorate General for Oil Affairs (PIGM) within the Ministry of Energy and Natural Resources is mandated to handle corporate requests for licences and leases for exploration and exploitation activities such as canalisations and refineries.

Invest in Turkey

Turkey has great potential for developing renewable energy. There is major demand within the country for small hydro power plants, wind power, solar energy, geothermal power generation, and waste to energy types of technologies. It is expected that €1.2 billion will be invested in wind energy alone. There is about 128 billion kWh per year in hydropower potential in Turkey. About 35 per cent of hydropower potential is used to generate electricity and hydropower plants with an installed capacity of 11 billion kWh/year are under construction. Many private companies are developing small and medium size hydropower projects. A new law on the use of renewable sources of energy was adopted in May 2006, establishing a legal framework for the promotion of renewable energies. The law outlines transitional measures between now and 2011 for more competitive prices for electricity generated at facilities holding a renewable energy resource certificate as well as incentives for investment in renewable energies.

Water and environment

Turkey is currently undergoing high demographic growth (1.6 percent per annum) in the wake of vigorous urbanisation, 68 percent of the population living in urban environments vs. 22.5 percent in 1955. More people and greater industrial production mean increasing pollution, particularly in the largest cities (Istanbul, Ankara, Izmir) and in light of soaring needs for urban, tourist and energy infrastructure.

The demand for water has increased proportionally.

Although there are reasonably good fresh water resources (110 billion m3 per annum that could be tapped, although only 38 percent is actually being exploited), the country suffers from unequal distribution. Water is found largely in eastern Turkey, while population density is concentrated in the west. To alleviate the accumulated needs of the past few years and in line with the

faster pace of EU harmonisation, municipalities and public agencies are giving top priority to water and wastewater treatment plants. Other concerns are air pollution and solid waste disposal. Compliance will require significant investment.

Figures developed by the EU estimate that some €45 billion in expenditure will be required over the period 2003‐2032. According to the results of the Integrated Compliance Strategy for the Environmental Sector in the Republic of Turkey, the overall cost of environmental investments is estimated at €23 billion and total compliance costs including adoption, implementation and investment will come to €21.8 billion. This means that approximately €1.5 billion in EU funds will be spent yearly on environmental issues. In the framework of pre‐accession financial aid, the EU budget for Turkey is €800 million for the period 2005‐2006, with initiatives grouped under three main headings: capacity‐building, legislative harmonisation and economic and social harmonisation. There are numerous opportunities in the environmental sector, particularly in the following fields:

Building and rehabilitation of water treatment and drinking water facilities;

Improvement of water resource management;

Wastewater treatment and drainage work;

Management of solid and liquid waste disposal, by both the public and private sector;

Rehabilitation or construction of discharge and composting plants;

Development of renewable energies, with non‐polluting transport and recovery of biogas, in the framework of measures against climate change and air pollution;

Invest in Turkey

Development of new ecological concepts (reservoir agencies, eco‐packing systems…);

Improvement of masterplans for the environment and urban transport.

While many Turkish contractors can supply basic pollution control equipment, Turkey must import advanced equipment. There are opportunities for foreign companies in collaboration with local partners throughout the environmental chain, from consultancy work with central and local government to supply of equipment to public structures and private companies. However, this is a very competitive market involving European, Asian, and Middle Eastern companies.

Transportation

Turkey is a rapidly developing country and its transportation sector has grown significantly over the past few decades. Turkey is currently implementing several large‐scale infrastructure projects: urban transport, interurban transit systems, highways, airports, ports, dams and water sewage networks, and urban transit systems.

A 10‐year transportation masterplan strategy has been launched. Currently, a €4.2 million EU funded twinning project is being carried out with Deutsche Bahn AG to prepare an action plan for railroad development. The sector, with 8697 km of rails, is managed by a public company, TCDD.

A radical shift in strategy was made in April 2005, allowing private sector involvement in railway transportation. There are currently 25 private companies operating in the country, holding a 25 percent share in overall transportation.

Priority goes to construction of high speed lines, while existing lines and wagons will be improved and upgraded, increasing current line capacity by 30 percent. Domestic production of

wagons, locomotives, and rails is being encouraged. Railway terminals and buildings and their surrounding area will be developed as recreational areas.

Branch lines are to be built to serve industrial zones, private train operators will be allowed, and some high speed train initiatives are at various stages of progress to increase travel speed to 250 km/h, including the Ankara‐Istanbul, Ankara‐Konya and Ankara‐Izmir lines. The Istanbul‐Ankara line is a priority item on the planning board. The other major project is the Marmaray Project that will run a line under the Bosphorus at a cost of some US$ 3.5 billion.

Turkey will need some 2000 wagons just for rail projects under construction. Another 3000 will be needed for projects planned by 16 municipalities, worth US$ 10‐12 billion in railway equipment. The biggest prize of all is the Haydarpasa Terminal Project, slated to be built under a 49 year BOT arrangement. The project foresees investment of some US$ 5.1 billion.

The national company Turkish Airlines (THY), 98 percent of which is held by the State, shares this market of almost 60 million passengers with international airline companies and low cost private operators.

After the opening of 23 percent of capital in Turkish Airlines, the government must yield an additional portion of shares in the national airline. THY, which currently has 93 planes, launched a major programme to renew its fleet by ordering 36 Airbuses, 15 Boeings and a flight simulator in July 2004.

Analysts envisage 7 percent growth in acquisition of air transport and cargo liners for each of the next 10 years, estimating that Turkey will need to increase its fleet to 300 planes by 2010 in order to meet expected growth in tourist traffic. Other studies undertaken by THY predict a 5 percent increase in demand for maintenance and repair services over the next 10 years.

Invest in Turkey

There are 34 airports in Turkey, 10 of which are open to both international and national traffic.

The six largest airports are located in zones with strong tourist potential:

Atatürk Airport in Istanbul (16 million passengers a year) managed by the consortium Tepe‐Akfen‐LIFE,

Antalya Airport in the Mediterranean area managed by the consortium Bayındir‐FAG (7.5 million passengers a year),

Esenboga in Ankara (4 million passengers),

Adnan Menderes in Izmir,

Dalaman and Bodrum‐Milas in the Aegean area.

BOT arrangements are anticipated for investment projects to expand airport capacity and modernise air safety, in particular at the new terminals of Antalya, Dalaman and Izmir ‐ Adnan Mendérès.

There are 61,500 km of roads and 1900 km of motorways. Urban congestion and pollution are a major problem. Road network expansion began with construction of the South Black Sea Road (560 km) and the Ankara‐Samsun route (402 km).

A consortium composed of Akbank, the Garanti Bank and Is Bank has secured an US$ 831 million loan for a highway project connecting the Caucasus region, Central Asia and Europe. Projects awaiting financing include a road across the Gulf of Izmit, which will cut journey time between Istanbul and the Aegean, and a third Bosphorus bridge.

Privatisation of ports has begun, except for Haydarpasa. Operational rights for Iskenderun (US$ 80 million) and Mersin (US$ 755 million) have been finalised and adjudication for the port of Izmir and the port of Samsun has begun. The Bandirma and Derince ports are slated for privatisation in 2006.

Success story: Schneider has created a network of 100 partners and exports out of Turkey Schneider Electric, one of the leading world manufacturers of electricity distribution equipment and industrial programmers (Merlin Gerin, Square D, Télémécanique brands) has been located in Turkey since 1987.

At the time, the group arrived in Turkey by directly creating a subsidiary called Schneider Electric Turquie 100% owned by Schneider Electric SAS. The objective was to profit from the economic growth of the country, to gain a foothold in a territory of strong industrial potential, and meet the needs of an emerging country where expenses in electric equipment are still very high.

Over the years, the presence of Schneider was to gain strength, as it accompanied the development of the country, the demand for electric equipment evolving in parallel with the rise in power of the country’s electricity network as well as the development of the Public Works sector. Today, the Schneider group, which had in 2006 a turnover of almost 14 billion Euros, has a complete commercial organisation in the country, with 13 branches and a network of 100 partners, a production site with two factories at Izmir, as well as a distribution centre near Istanbul.

The world number one in circuit‐breakers, switches and electric sockets today employs a total of 400 people in Turkey with a turnover of 74 million Euros in 2002.

« The situation is positive » underlines the group when asked about the main lessons to be learnt from its presence in the country. It especially highlights the quality of the production site of Izmir. The factory was chosen to satisfy the global needs of Schneider Electric for the supply of medium voltage boards. A sign of world recognition of Izmir and Turkish know‐how.

A N I M A Euro-Mediterranean Network of Investment Promotion Agencies

ANIMA is a European project devoted to helping 10 Southern Mediterranean and Middle Eastern countries partners of the EU (“MEDA” countries: Algeria, Palestinian Authority, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia, Turkey), plus Cyprus and Malta (now EU members), to acquire strategies and tools to attract foreign investments. The Invest in France Agency (AFII), assisted by the ICE (Italy) and the Direction des Investissements (Morocco), is running this project, which is financed by the European Union, MEDA Programme. The City of Marseille, the Region Provence‐Alpes‐Côte d’Azur and the Invest in France Agency also contributed to the publishing of this study.

Invest in the MEDA region, why, how ? Algeria / Egypt / Israel / Jordan / Lebanon / Libya Morocco / Palestinian Authority /

Syria / Tunisia / Turkey

PAPERS & STUDIES n°22 / April 2007

This practical guide gives good reasons to invest on a territory which shares a common destiny with Europe –even if this partnership must develop novel approaches. Neighbour of the European Union, made up of 10 States partners (plus Libya as an observer), the MEDA region is rich in 2007 of its 265 million inhabitants, producers, and consumers. The region should reach 320 million inhabitants in 20 years. A stronger integration with Europe seems natural: history, geographical proximity, languages, complementarities of resources, whether it is sun, water, energy or labour. However, if Europe is significant for MEDA countries (representing 50% of their foreign trade, for example), the latter count little for the old continent (which invests in MEDA only 5% of its worldwide private capital).

The European and world firms know that they must look at MEDA. It is an intermediate market –incomes per capita resembling those of Portugal or Greece before EU. MEDA is a formidable development reserve for a European growth which needs second breath. Beyond easy relocations, based on labour cost attractiveness, numerous firms start understanding the possible interest of a co‐development based on true benefits for the two banks.

MEDA in turn vitally needs European private investment. EU capital flows may at the same time contribute to modernise the economic and social fabric, suggest efficient industrial models, inject the money which States can seldom release, develop growth in both Europe and the south, finally participate in the long awaited area of peace and security.

Sonia Bessamra, independent consultant, Bénédict de Saint‐Laurent, coordinator of the ANIMA programme within Invest in France (Agence Française pour les Investissements Internationaux), have managed the preparation of this collective work with the ANIMA team and the MEDA IPAs.

www.animaweb.org

Syria / Tunisia / Turkey - ANIMA Investment Network

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