ZARZIS FREE TRADE ZONE DISAPPOINTED BY LACK OF AMERICAN INVESTMENT

UNCLASSIFIED,FOR OFFICIAL USE ONLY UNCLAS SECTION 01 OF 02 TUNIS 002414 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/MAG (HARRIS) AND EB/CIP STATE PASS USTR (BELL), USPTO (ADLIN AND ADAMS), USAID (MCCLOUD) USDOC FOR ITA/MAC/ONE (ROTH), ADVOCACY CTR (JAMES), CLDP (TEJTEL), AND HOUSTON USEAC CASABLANCA FOR FCS (ORTIZ) LONDON AND PARIS FOR NEA WATCHER E.O. 12958: N/A TAGS: ECON, EINV, ETRD, BEXP, LY, TS SUBJECT: ZARZIS FREE TRADE ZONE DISAPPOINTED BY LACK OF AMERICAN INVESTMENT REF: TUNIS 1630 1. (SBU) Summary: Ten years after its opening, the Zarzis free trade zone, located in Southeastern Tunisia, has failed to create the foreign investment and job promotion intended, despite generous incentives offered by the GOT. In a meeting with EconOff, newly-designated Director General for the Zarzis free trade zone Khaled Touibi expressed frustration and bewilderment at the lack of foreign, and particularly American, enthusiasm for investing in Zarzis, and expressed hope that the tide would turn due to the end of the sanctions against Libya. End Summary. 2. (U) In 1992, the Tunisian government created free trade zones in the Northern city of Bizerte and Southern city of Zarzis in order to attract foreign direct investment, create jobs, and increase exports. The free trade zones also have the goal of aiding development of regions outside the capital. The free trade zone in Zarzis, a port city on the Southeast coast of Tunisia, opened for activity in 1996 with a package of incentives for foreign investors including a ten-year tax holiday, full convertability of the Tunisian dinar, and duty free imports of necessary components and services. (Note: The Tunisian dinar is not fully convertible and Central Bank authorization is sometimes required for foreign exchange operations. End Note.) In addition, exports to Libya are currently duty free and in 2008 Tunisian exports to the E.U. will gain duty free status. Due to Zarzis' proximity to Libyan and Eastern Algerian oil and gas deposits, energy companies have been a major target for investment, but the zone leadership welcomes investment from all sectors. 3. (SBU) Despite the favorable tax and customs concessions, the free trade zone has had great difficulty attracting the quantity and quality of foreign investment expected. In its ten years of existence, the Zarzis free trade zone has only produced 14.1 million USD in foreign investment and created a paltry 200 jobs. While the zone is home to 52 projects, most of these have been relatively small, and none have involved American investment. Newly-designated Director General of the Zarzis Park of Economic Activities Khaled Touibi expresses frustration at the lack of interest on the part of major companies and American investors. While Touibi was willing to concede that Americans lacked information about doing business in Tunisia, he asked why U.S. companies have not taken advantage of the opportunities in Zarzis, or throughout Tunisia more generally. When Econoff suggested that perhaps the prior difficulties faced by major U.S. companies such as McDonald's or Pizza Hut had negatively affected American business' perceptions of Tunisia (reftel), Touibi vehemently denied that there are or were ever any barriers for Americans to do business in Tunisia. 4. (U) Touibi readily admitted that the free trade zone's performance to date has not met expectations, yet was puzzled as to why this was the case. During his tenure, Touibi aims to to boost investment, increase working capital, and revive previously signed cooperation agreements, including the cooperation agreement signed in 2001 with the Houston Port Authority. In addition, the free trade zone is currently in talks with Maersk to establish a regular maritime line to Zarzis, addressing one of the port's major shortcomings. Deputy Manager of Tunisia's Maersk office Lofti Mouelhi confirmed that Maersk is currently conducting feasibility studies, but noted Maersk concerns that there is not sufficient volume of shipments in and out of Zarzis to justify opening a maritime line. The free trade zone staff expressed hope that the end of the sanctions against Libya would also increase interest in Zarzis. However, the number of inquiries from foreign investors has not increased to date. Though the zone's leadership was reticent to discuss the competition for investors with the Bizerte free trade zone, Bizerte commands a significant geographical advantage TUNIS 00002414 002 OF 002 for all sectors except oil, due to its proximity to Tunis. 5. (SBU) Comment: With recent Central Bank figures showing a widening trade deficit, the GOT is eager to see Zarzis become a major export hub and views American investment as important to that goal. However, Zarzis is likely to remain the less successful of the two free trade zones unless and until it successfully targets major oil companies. For the GOT, accustomed to a state-driven model of investment, the lack of American investment in Zarzis is indicative of American interest in investing in Tunisia as a whole. Post will continue to look for opportunities for American business in Zarzis as well as possible avenues of cooperation with the Zarzis free trade zone, particularly as they try to revive and increase their cooperation with Houston. End Comment. BALLARD