Jordan Times
Monday, September 17, 2001

Qualified Industrial Zones (QIZ) represent golden opportunities for investors to relocate production plants to the Kingdom

Introduction

Back in 1996 the United States Congress established the Qualifying Industrial Zone (QIZ) initiative to support the peace process in the Middle East. Later in November 1997, Jordan, Israel, and the United States signed an agreement designating Al Hassan Industrial Estate in Irbid as Jordan's first QIZ.

QIZs represent a golden opportunity to many investors to relocate their production plants to Jordan and obtain quota and duty free access to the much sought after US market.

Jordan has so far benefited considerably from the foreign direct investment in the QIZ it boosted exports to the United States, provided employment to over 20 thousand of Jordan's labour force, and transferred the technology as well as the know-how of different industries.

Since signing the agreement the total number of QIZs have been multiplying. There are 6 QIZs in Jordan and one sub-zone. Four more QIZs are expected to be operational in the near future.

As more companies aspire to work under QIZ conditions and take advantage of the many privileges it offers they are reluctant to do so due to the political instability in the West Bank and Gaza. Thus the pace of future growth in QIZ companies will be dependent on the political stability in the region.

QIZ criteria

A QIZ is any area that is specified as such by the US Government and designated by the Jordanian authorities as an area where products manufactured may enter the US market duty and quota free. For products to qualify for QIZ status, 35 per cent of the value of the product must be contributed by a manufacturer located within the QIZ in one of three ways:

1. At least 11.7 per cent of the final product must be contributed by the Jordanian manufacturer in the QIZ and 8 per cent by an Israeli manufacturer (7 per cent for hi-tech products). As for the rest (15.3 per cent) it can be fulfilled from QIZ Jordan, the West Bank/Gaza Strip, Israel or the US. The other 65 per cent production expenditure can be from anywhere in the world.

2. Jordanian and Israeli manufacturers must each maintain 20 per cent or more of total production cost, which include among others wages salaries, design, and materials.

3. QIZ producers are allowed to mix and match between the above two methods, as long as the total cost of production plus the cost of the material content equals at least 35 per cent of the appraised value of the product.

With regards to the rules of origin that apply, the goods must be manufactured in the QIZ or one which has been substantially transformed as a result of manufacturing in QIZ into an article having a new name and character. No article will be considered new or different and no material shall be considered new or different if it had only undergone simple combining and packaging operations. In the case of textiles and apparels, rules set out in the Uruguay Round Agreement Act, USC. 3592 section 334 apply.

A joint committee, which consists of a Jordanian representative appointed by the Jordanian Government, an Israeli representative appointed by the Israeli Government and an American observer has the authority to grant products duty-free access to the United States and also cancel it if the requirements are no longer met. This approval by the joint committee is renewed on an annual basis and can be cancelled if the previously approved goods no longer comply with the QIZ criteria. QIZ approval is given for a period of 12 months, prior to the expiry date the applicant has to submit new figures and accordingly the approval will be renewed. The committee is also in charge of transmitting to the United States customs names of businesses eligible for duty free access to the US market.

Investments in QIZs

The total number of operational QIZs in Jordan is seven including one sub zone. Investments in QIZs currently amount to a total of JD148 million, with around JD80 million in the pipeline. The total number of QIZ projects has reached 36. It is important to note that not all manufacturers in industrial estates are operating under the QIZ status, thus some pharmaceutical, chemicals, wood, rubber, and plastics manufacturers are located in industrial estates, but are not QIZ projects. Most QIZ investors are from Asian countries like China and Pakistan; some Arab investors have also invested in QIZ Jordan. Jordan Industrial Estate Corporation owns and operates two industrial estates:

1. Al Hassan Industrial Estate (Irbid): Located 75km north of Amman and 20km from the city of Irbid, was the first industrial estate to be designated as a QIZ. It enjoys the lion's share of projects; there are 13 QIZ projects in Al Hassan Industrial Estate and 17 in the pipeline. The total amount of QIZ investments in Al Hassan Industrial Estate has reached JD63.5 million thus representing 43 per cent of total investments in QIZ. Al Hassan Industrial Estate was completed in 1991. It went through two expansion projects to meet investors' demand, and currently has an area of 1.2 million sq. metres. Different products are manufactured in the estate including cotton, weaving, and pharmaceuticals. The total amount of investments in Al Hassan Industrial Estate including non-QIZ projects has reached by the end of 2000 JD168 million. Thus QIZ investments represent 38 per cent of investments in Al Hassan Industrial Estate.

2. Al Hussein Ibn Abdullah II Industrial Estate (Al Karak): It is located 110 km south of Amman on the highway connecting Amman and Aqaba. The total number of projects reached 3 while the total amount of QIZ investments is JD20 million.

The other five zones are privately owned and operated:

1. Al Tajamouat Industrial City: Has 10 QIZ projects with total investments reaching JD26.2 million. Al Tajamouat is located in the greater Amman area, 20 km from downtown Amman and 25 km from Queen Alia International Airport. It occupies an area of 300,000 sq. metres plot of land. This industrial park is owned and operated by the specialised investment compounds company Plc. (Al Tajamouat) with a capital of JD10 million.

2. Ad-Dulayl Industrial Park: Located 45km northeast of Amman. It is in the centre of Ad-Dulayl town. The total number of projects reached 6 with a total investment capital of JD14.2 million.

3. Cyber City: The project is located next to Jordan University of Science and Technology in Irbid, the university contributed over 4,000 dunums to the project. To add extra value to the Project, the Free Zone status is also made available, making the Cyber City Project the only QIZ with a Free Zone designation. At maturity, it is estimated to have approximately 500 tenants with a working population of 200,000. The tenants will mostly be manufacturers targeting the US market. To date, one Taiwanese company has commenced operations in the project over a factory space of 12,000 sq. metres. And by year-end, construction is expected to commence on building approx. 100,000 sq. metres of factory floor space.

4. Al Qastal QIZ is located 35km from Amman; the zone received the QIZ status in 2000 and already has one project. The total area of Al Qastal is 4 million sq. metres.

5. El Zay sub-zone: is part of EL-Zay Ready Wear Manufacturing Company, which is a Jordanian public shareholding company specialised in the manufacture of high quality men's suits. The company is located in Russaifeh, and received the QIZ status in December 2000.

Four more QIZs are expected to be operational in the near future; Al Aqaba, Hillwood, Al Mashta and the Gateway Park.

Macro effects of QIZs

QIZs have affected the economy at the macro level they increased job opportunities to many unskilled labourers, increased foreign currency earnings due to the increase in exports, and helped create new businesses for local companies. Overall QIZs cause a multiplier effect as money circulates in the local economy.

Exports

Since the establishment of the first QIZ, exports to the United States have increased substantially. Exports from QIZs comprise primarily of apparels and luggage goods. Back in 1998 exports to the United States were JD5.5 million. In 1999 they reached JD9.3 million representing 0.88 per cent of total Jordanian exports. In 2000 total exports to the United States reached JD44.8 million, an increase of approximately five folds from the year before. According to the QIZ unit at the Ministry of Trade and Industry, QIZ exports to the US have reached JD54 million up until the end of August 2001. We project QIZ exports to increase in value by year-end to reach JD150 million, thus representing approximately 12 per cent of total Jordanian exports.

This increase in exports to the United States raised Jordan's foreign exchange earnings, it is also expected that earnings will grow even further in the future.

Employment

Investors have moved their operations to QIZ Jordan to take advantage of the duty and quota free access to the US market. Although labour in Jordan is relatively more expensive and less skilled it was still enticing for investors to come to Jordan and take advantage of the US market. QIZ factories began their operations with 50 per cent of the labour comprised of foreign workers while the rest were locals. This was the case because most of the local workers did not possess the skills needed for the job. According to the latest available data from the Jordan Investment Board the total number of workers employed by QIZ companies reached 20,681. The percentage of expatriates ranges between 25-30 per cent. A large segment of the unskilled workforce is expected to benefit from QIZ companies, which are willing to train them and enhance their skills.

QIZs are expected to expand employment opportunities in Jordan thus improve unemployment figures, which currently stand at 13.7 per cent. The government is calling for the decrease of expatriate workers as a per cent of total employees to reach 10-15 per cent. In return the government has established new training centres to improve the skills and increase the efficiency of local workers in the garment industry.

Banking, logistics & insurance services

Banks along with insurance companies in Jordan have benefited from the launching of QIZs. Most QIZ companies insure locally and make use of local transport facilities including the port of Aqaba.

Construction and infrastructure

The industrial estates have provided QIZ investors with the infrastructure needed to start their operations, and have thus contributed positively to the construction sector in Jordan. Industrial estates provide investors with the basic infrastructure needed to start their operations:

* Buildings serviced with a network of roads.

* Communication lines.

* Industrial power supply.

* Sewage networks.

*Water networks for industrial use along with fire fighting water facilities.

Early arrivals

Boscan Middle East Investments Ltd

Boscan Middle East Investments LTD (BMEI) is a holding group with established shareholders from the Far East and the Middle East. BMEI is principally engaged in the design, manufacture and the sale of a wide range of travel goods (Luggage division) and textiles apparel (Garment division) for the USA market as well as the development of information technology industrial park (Cyber City project).

Luggage division: This division manufactures a variety of soft side travel luggage. The customers of the luggage division are mainly licensees or owners of brand names who in turn sell to major department stores in the US such as Federated Stores and JC Penny.

The luggage division builds its production capacity around demand generated by US-based customers, who up until now have demonstrated the capability to purchase the entire production output. The luggage division is located in Al Hassan Industrial Estate, Irbid. Total gross floor area of the luggage division is approximately 40,000 sq. metres. The division employs approximately 1,200 employees, 33 per cent of the employees are Chinese and the rest are Jordanians.

On the Dec. 31, 1999 the luggage division ended its first 12 months of operation during that period total sales have reached approximately $9 million. In the year 2000 sales have more than doubled reaching $21 million.

Production in the QIZ gave luggage manufacturers price advantage over its competitors in other countries due to the duty and quota cost imposed by the US government on other manufacturing countries. This has allowed the company to increase its operating income and pass on some of its savings to its customers.

Garment division

The garment division is primarily engaged in the design manufacturing and sale of woven and knit garments such as casual pants, t-shirts and jeans. The division is located in Al Hassan Industrial Estate and has head offices in Amman and Hong Kong. The division manufactures for the major brand names in the US, including GAP, Tommy Hilfiger, Rafaella, Ralph Lauren and major department stores such as JC Penny and K Mart.

The garment division started its operations in 1999. The garment division main operating companies are Falcon Jordanian Garment Limited and South Asia Garment industries Limited. The total floor area of the garment division is approximately 40,000 sq. metres. The division employs approximately 3,000 workers.

Manhattan Apparel Manufacturing Company:

The company is partly owned by A. H. International Group, which owns apparel and fabric subsidiaries in the United Arab Emirates and Pakistan. Manhattan started its operations in QIZ Jordan in March 1999 with a factory that had an area of 1,630 sq. metres and employed approximately 240 workers. Over the past two years the company expanded. It currently has three factory locations, in Al Tajamouat QIZ, with a total floor area of 9,558 sq. metres, and produces 50,000 — 60,000 apparel items a month. It owns 650 machines and employs 1,150 employees. Expatriates comprise 20 per cent of total employees. The sales for 2001 are expected to reach approximately $15 million.

QIZs versus FTA

QIZ critics argue that the much-celebrated QIZ agreement turned out to be redundant considering that Jordan signed the Free Trade Agreement (FTA) last year with the US Government and is awaiting ratification by the US senate. But taking a look at the differences between the QIZ and FTA points to the advantages of one over the other. QIZs grant immediate tariff and quota free access to the US market whereas under the FTA tariffs and quotas are reduced gradually over time. Under the FTA rules of origin, the agreement requires a 35 per cent Jordanian content.

According to some investors this can be difficult to achieve. In contrast, the minimum Jordanian requirement under the QIZ is 11.7 but investors would have to include contents made in Israel, which is considered by many Arab investors as a stigma they would rather avoid. Some investors are buying from 1948 Arab businesses in order to avoid dealing with Israelis. On the other hand, to produce under the QIZ, the area of production has to be designated as such by the US government whereas with the FTA the investor can produce wherever is suitable for them. Therefore depending on the product, investors can choose to produce under the FTA or the QIZ.

For example, apparel goods could face up to 30 per cent tariff when entering the US under the FTA, tariffs on these goods would be reduced over ten years; in addition Jordanian exports would have to meet a 35 per cent Jordanian content level. Under the QIZ initiative, those same goods would have the benefit of immediate removal of tariffs and quotas, and also require lower level of Jordanian inputs.

In this case, QIZ would assist in establishing the garment industry in Jordan by creating a pool of skilled workforce that possess the experience and knowledge needed in the garment industry. Hence for the next 10 years, QIZ's will continue to have the added advantage over the FTA.

Obstacles facing investors

Political turmoil in the West Bank and Gaza: Many potential investors are attracted by the privileges of investing in QIZ Jordan but are reluctant to invest due to the political unrest across the border. As for the already established QIZ companies they feel that the unrest is only temporary and does not effect their day-to-day operations, hence are moving forward with their expansion plans.

Labour force: When QIZs were first launched expatriates from China, India, Sri Lanka, and Pakistan comprised 50 per cent of total labour employed. This was the case due to the low productivity of Jordanian labour and also their lack of experience needed in the garment industry. In addition, locals were less inclined to work extra hours for extra pay than expatriates, thus investors had to deal with cultural differences. On the other hand hiring foreigners meant that investors had to incur the extra cost of providing them with accommodation; they also had to go through the hassle of obtaining work permits, along with paying additional fees. Since their establishment QIZ companies have been training locals in order to replace expatriates. Currently locals comprise approximately 70 per cent of total labour employed in QIZ. On the supervisory level most workers are still expatriates, since Jordanian workers still lack the experience needed to takeover those positions. In few years investors expect that local workers will be qualified to take over such jobs. Employing locals also meant that Investors had to provide them with transportation to and from the factories since most of those workers live in remote areas and cannot rely on public transportation, which turned out to be an expensive process to investors. Many investors feel that the productivity of local workers and the quality of their work have improved substantially over the past couple of years.

Future outlook

QIZs will contribute significantly to the Jordanian economy by increasing exports, improving employment figures and increasing the expertise available in the garment industry. It is estimated that QIZs will create 15,000 new job opportunities in the near future, thus increasing the importance of QIZs in Jordan.

Exports from QIZs are expected to increase by year-end, to reach approximately $200 million, which would increase QIZ exports as percentage of total Jordanian exports. Over the long run we expect the effect of US-Jordan FTA to be much greater on the Jordanian economy than that of the QIZ, but until then Jordan will benefit from the QIZ initiative.

The future increase in the number of QIZ companies will be a function of the political stability in the region as many potential investors are deterred by the instability in the West Bank and Gaza.

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