How well do our freezones perform compared to the UAE and Turkey? To boost foreign investments in local industry, the government has introduced tax incentives and swift land allocation, with a push towards establishing freezones. Despite the incentives, these zones face hurdles, leading to comparative underperformance vis-à-vis the UAE and Turkey, according to a comparative study by the Egyptian Center for Economic Studies (ECES), that explored the setbacks and opportunities of freezone activity in the country. While the government remains optimistic, the private sector points out procedural and legislative barriers still to be addressed in order to better the investment climate and foster industrial growth.

Enterprise attended a panel discussion on freezones in Egypt, the UAE, and Turkey,based on ECES’ study. You can watch the event in full here.

WHERE DO OUR FREEZONES STAND IN RELATION TO THE UAE AND TURKEY?

Freezones appeared in Egypt before the UAE and Turkey, with our freezone system dating back to 1973 in Nasr City and Alexandria. Today, Egypt has approximately 218 zones. Nearly half of Egypt’s exports — totaling USD 22.2 bn in 2022 — come out of the country’s freezones, compared to USD 18 bn in Turkey (c.7%) and USD 105 bn in the UAE (c.29%).

But growth of exports from freezones is lagging in Egypt: Since 2017, exports from Egyptian zones have increased at an average annual rate of 7%, falling behind the UAE (12%) and Turkey (8%), according to the study. Excluding the outlier of 2022 — when Egyptian zones experienced a 32% spurt mainly driven by petroleum exports — the overall average annual growth drops to 2%.

Freezones in Egypt are also less export-oriented than the UAE and Turkey: A significant portion of output from Egyptian freezones goes towards the domestic market, with less than half (42%) of output exported to foreign markets. By comparison, around 92% of output from the UAE’s freezones and 65% of that from Turkey’s freezones is exported.

The three countries also have different priority sectors for their freezones: Industrial freezones dominate the landscape in Egypt, followed by service and storage zones. Industrial projects account for 47% of Egyptian freezone ventures, and industrial exports comprise 48% of total exports from these zones. This contrasts with Turkey, for example, where manufacturing represents up to 96% of freezone exports.

Petroleum products and manufacturing dominate our freezone exports, while machinery and electrical equipment are the biggest freezone exports in the UAE: In Egypt, petroleum refining and ready-made garments/textiles claim the lion’s share of freezone exports, totaling around 66%. Notably, the petroleum sector experienced a significant uptick in 2022, jumping to 52% from 37% of total exports. However, machinery and electrical equipment sectors in Egyptian freezones struggle with inconsistent export performance, accounting for no more than 6% of total exports. In contrast, the UAE's export structure diverges, with machinery, electrical equipment, and vehicles sectors collectively constituting about 65% of total freezone exports in 2022.

THE SETBACKS-

Egypt attracts the smallest share of foreign investments out of the three countries, with foreign investments constituting only 20% of all freezone investments, compared to 26% in Turkey and a staggering 80% in the UAE. The Jebel Ali Freezone alone draws in 24% of Dubai’s total foreign direct investment inflows.

Freezones employ a relatively small proportion of our workforce: Egyptian freezones contribute approximately 47% of total exports but employ fewer than 200k workers — less than 1.3% of the national workforce. Compared to other countries, Egypt ranks second in total workforce size, trailing Turkey.

Egypt lags behind in high-tech industries and has a relatively low value added from freezone exports compared to Turkey, where high-tech industries represent approximately 1% of zone activity.

Investors experience a number of hidden costs which hinder freezone expansion, according to Nadim Elias, chairman of the Federation of Egyptian Industries’ printing and packaging export council. These include registration fees on the Nafeza platform and intermediary commissions when needing to purchase supplies from a factory under internal investment, which burden investors and increase production costs.

WHAT SHOULD BE DONE TO FURTHER DEVELOP FREEZONE ACTIVITY IN EGYPT?

More freezones and sector-specific incentives are on the way: Prime Minister Moustafa Madbouly has greenlit four new freezones across different sectors, along with planned amendments to incentives, focusing on sector-specific incentives to enhance industrial offers, sources from the General Authority for Freezones and Investment (GAFI) told Enterprise. Investors have been opting for projects with shorter construction timelines to maximize the current seven-year tax exemption period, however, some industrial and mining projects such as iron and steel, machinery, and equipment often require two to three years before production starts, the sources explained. Moving forward, GAFI intends to tailor the incentives to match the timeline.

Efforts are also underway to revive the Qeft freezone in Suez, with 14 proposals submitted to the Oil Ministry, the sources added.

Freezones are a stopgap measure until investing in Egypt gets easier: Internal investment is crucial, but freezones also hold importance because of the ease of procedures and market access provided by these zones, said GAFI boss Hossam Heiba. When investment within Egypt becomes easier, the role of freezones will be limited, he believes.

Agreements between the Finance Ministry and other relevant ministries aim to streamline the investment climate while protecting internal investment, Heiba said. For foreign investors, ease of doing business is more important than tax concerns, Heiba added. Streamlined procedures are now in place to expedite company registration and tax filing.

Public vs private freezones: On the one hand, officials such as Heiba advocate for expanding public freezones for more control — the plan is to designate private freezones only in distinguished sectors such as mining and technology, Heiba said. On the other hand, Moatasem Rashed, the head of the Private Freezones Investors Association, believes that private freezones are more disciplined than the temporary admission system and have spurred investment in Egypt in recent years. There’s a need to better equip freezones, especially those in remote areas such as Minya, to more evenly distribute investment, he added.

Labor laws imposed on free zone investors ought to be reviewed: Labor laws are now binding for freezone investors and therefore need to be reviewed to protect competitiveness, Ipsos International Managing Director Amr Qais said. Qais pointed to the Labor Act’s 1% tithe on businesses’ net income for a Manpower Ministry “training fund,” which he suggested should be scrapped for freezone investors, particularly as some industries already require significant training for their workforce.

Physical expansion + land allocation: Demand for Nasr City freezone expansions outstrips available space, prompting a search for areas in Greater Cairo, Heiba said. Likewise, the Alexandria area will see a satellite zone in Borg El Arab or New Alamein due to land scarcity. “We have finished our discussions with the New Urban Communities Authority and have approvals and coordinates for new lands,” Heiba clarified. Elias also called for more land allocation in Nasr city and Alexandria to expand existing factories to bolster export volumes.