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Cablegate: Massawa Free Zone

VZCZCXRO2599
RR RUEHROV
DE RUEHAE #0037/01 0281123
ZNR UUUUU ZZH
R 281123Z JAN 08
FM AMEMBASSY ASMARA
TO RUEHC/SECSTATE WASHDC 9402
INFO RUCNIAD/IGAD COLLECTIVE
RUEHLO/AMEMBASSY LONDON 1582
RUEHFR/AMEMBASSY PARIS 1760
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEPADJ/CJTF-HOA J2X CAMP LEMONIER DJ
RUEKDIA/DIA WASHDC
RUMICEA/JICCENT MACDILL AFB FL
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 02 ASMARA 000037

SIPDIS

LONDON AND PARIS FOR AFRICA WATCHERS
DEPT FOR AF/E AND INR

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV ETRD ER
SUBJECT: Massawa Free Zone

Ref: 07 Asmara 000683

1. Summary: On January 9, Ambassador and Poloff toured the future
Massawa Free Zone with Issayas Ghebregziabiher, Eritrean Free Zone
Area Coordinator. Recent building activity was evident although
Issayas cited slow progress in building the necessary infrastructure
to allow companies to begin operations. Fourteen international
companies have completed the license application process, with
another six in process. Pending completion of the infrastructure
projects, Issayas envisions the Free Zone will become operational in
2008. End Summary.

------------------
CURRENT CONDITIONS
------------------

2. On January 9, Ambassador and Poloff toured the site for Massawa's
long-planned future Free Zone, located on an old Eritrean naval base
north of the city. Evidence of new construction included five newly
completed small warehouse complexes, each consisting of two or three
warehouses of varying sizes, and a number of newly poured concrete
pads for additional facilities. Nonetheless, Issayas noted that
progress has been slow. Existing roads are visibly in need of
upgrades. Access to the Zone consists of a single circuitous,
two-lane road through the center of Massawa city. Inside the zone,
the roads are in medium-to-poor condition and mostly unpaved.

-------------------------
INFRASTRUCTURE CHALLENGES
-------------------------

3. Issayas noted that other infrastructure deficiencies, i.e., lack
of water, inadequate telecommunication services, and electricity
availability, still must be addressed before the Zone can become
operational. Planned infrastructure upgrades include construction
of two electrical substations and a generator to supplement the
city-provided electricity. He added that Eritrea's telephone
company, Eritel, has invested heavily in state-of-the-art
telecommunications technology for the Zone through (unnamed) Chinese
companies. The Zone Authority has also slated a currently derelict
jetty for renovation to provide docks and a fuel depot separate from
the existing port facility. In addition, a dam is being built
nearby to contain the summer runoff from the escarpment and provide
necessary water. The Government of the State of Eritrea (GSE) also
plans to construct a conference center and display area, as well as
office space for insurance and credit card processing services and
customer call centers.

----------
INCENTIVES
----------

4. Fourteen companies from Italy, Germany, Israel, and the Arab
states have completed the licensing process, but will not be allowed
to start operating until the completion of the infrastructure
upgrades. Issayas noted that six more international companies are
in the process of applying for licenses. Issayas anticipates the
Zone will be used in the immediate term almost exclusively for
trading of goods between foreign entities, but at least two of the
first fourteen companies will be manufacturing products: one making
PVC pipes, the other an Israeli-owned textile factory. He noted
that one American company, Cargil, has expressed tentative interest
in processing grains within the Zone. Issayas noted that Zone
incentives will include: 100% repatriation of profits, no taxes,
unrestricted import of labor, and low rent charges for warehouse and
office spaces. The GSE will benefit from converting wages and
service payments from hard to local currency through the central
bank, and the entire country will benefit from providing services to
companies inside the Zone, increased employment opportunities, and
technology transfers. Issayas noted the Zone will have an
independent board of directors outside of ministry control (although
he added this "independent" board will be chaired by the Minister of
Finance).

5. Comment: The GSE's plans for establishment of a Free Zone appear
to be coming to fruition, albeit very slowly, after years of
planning. Understanding that reliance on remittances from the
diaspora for hard currency is not a viable long-term strategy, the
GSE hopes the Free Zone will provide a more reliable and
controllable revenue source. End Comment.

ASMARA 00000037 002 OF 002


MCMULLEN

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