Regional Integration Framework: Industry for Peace Initiative in Palestine Ankara, 20 March 2006

Regional Economic Integration Framework Slide 2 Overview Business Association Networks  Ankara Forum Process  Industrial Estate Project Local Capacity Building in Palestine  Chamber Development Project  Industrial Park Management Capacity in Turkey  TEPAV-Economic Policy Research Institute

Regional Economic Integration Framework Slide 3 How it got started? What is in it for Turkey?  Time for regional integration of our economy for sustainable growth. (not only to foster EU process).  Need for stability in the region for enhanced trade and investment relations.  Trade is the basis of sustainable peace. Why in Palestine?  Oldest and basic conflict in the region. Why now?  A new process has started with Israeli disengagement.

Regional Economic Integration Framework Slide 4 What can be done? It is best to think through concrete projects and create examples. Grand projects falter. Best to think small. An example: our efforts for the revitalization of an industrial estate in Palestine Problems of the Palestinian Economy  Closure Problems  Integration issues: Israeli economy requires Israeli cooperation World economy (a re-exporting base?) requires the support of the international community  The need for job creation (especially in Gaza to create a positive expectations process.)

Regional Economic Integration Framework Slide 5 The Estate Project We started with the most difficult area Idea came at one of the Ankara Forum meetings  Forum first started as a network of businessmen for cooperation  A concrete project was needed to monitor and test the words of politicians An opportunity to leverage the know-how of Turkish Chambers in:  public-private dialogue  Industrial park management  Doing business under extraordinary circumstances A microcosm of all political and economic problems

Regional Economic Integration Framework Slide 6 Progress Recap: Where We Are Now Political decisions certified official support, Joint Declarations signed with both Palestine and Israel on January 4 and 5, 2006 The Developer Company (TOBB-BIS) established in Turkey and registered in Palestine Investment Promotion Activities started Task Force established for trade facilitation and security arrangements Engineering Team on the ground, projects to be completed by March 2006 Constructions to be finished by July 2006 March 2006 elections in Israel ?

Regional Economic Integration Framework Slide 7 Palestinian Industrial Free Zone

Regional Economic Integration Framework Slide 8 A Unique & Exemplary Project It is not an ordinary business project.  requires effective coordination among the two not-so- friendly sides – PA and Israel  private-public dialogue is key throughout the entire process But, it is still a business project.  If we want it to be sustainable, it must generate profits. Under appropriate security conditions.  If there’s fresh air for the investors, business prospects don’t seem too bad (especially, given the resources ready to flow into the region and generous FTAs.)

Regional Economic Integration Framework Slide 9 Political support is now certified Joint Declarations were signed with Israel and PA on January 4 -5, 2006  This was no easy task.  We saw that many people have the tendency to reflect big political problems on very small steps.  Profit opportunities can easily fall prey to this tendency. Lessons learned:  Effective public-private dialogue mechanisms have to be in place for protecting the small steps. (Ankara Forum as an enabling mechanism)  Steps must be small to avoid castles to be built upon, and also technical to avoid political fights.

Regional Economic Integration Framework Slide 10 Support of the International Community James Wolfensohn (Former President of the World Bank President and Quarter’s Special Envoy for Palestine) Paul Wolfowitz (President of the World Bank) Mark Otte (EU’s representative for the MidEast Peace Process) Olli Rehn (EU ’s Enlargement Commissioner) Javier Solana (EU’s Common Foreign Policy Commissioner) US Agency for International Development (USAID) The World Bank Group (MIGA, IFC) East West Institute Chicago 10 Group

Regional Economic Integration Framework Slide 11 Political Decisions Declared Israel has officially shown that  Job creation in Gaza is in the interest of Israel Israel is ready to contribute to the economic growth of Gaza  It is possible to go beyond the Rafah Agreement (i.e. Movement of goods via Israel / not only the movement of outputs but also inputs) “ practical arrangements for the facilitation of operation of the PIFZ, including the usage of the Israeli maritime ports for exports and imports to and from the PIFZ would be coordinated between the two sides” Requirement of an Environmental Impact Assessment Report! PA has officially shown that  Special economic zone status will be provided A regulatory coordination unit will be established Concessions can be given in taxes and customs Free Zone Status  Security issues can be handled by a third party Now the task is to transform all these possibilities and the good will into concrete steps. Operationalize the good will statements.

Regional Economic Integration Framework Slide 12 Formulating the most feasible framework: Ordinary tasks, extraordinary mechanisms Movement of Goods  market access  customs regulations Security arrangements Infrastructure + construction Investment promotion Effective service delivery  Infrastructure  Regulations Require special status and special arrangements = Special Economic Zone ( A SEZ for Gaza) Phase Two Phase Three

Regional Economic Integration Framework Slide 13 The need to create interim solutions Trade facilitation will not be smooth First best options are not available, at least for the medium term  i.e. Ports and airport in Gaza Second-best and interim solutions need to be realized  Access via Israel  Logistic center at the border  Support of the international community can make the efforts workable (testing of the good will)  Access via South?

Regional Economic Integration Framework Slide 14 Investment Promotion Providing incentives (fresh air)  Security package (Overhead costs lower profitability)  Incentive package (Necessary to compensate overhead costs). Loan guarantees Market guarantees: contracts Investment guarantees Regulation – enforcement guarantees Tax exemptions. Resources are available, donors are willing to let them flow into the region  what is needed is a concrete and doable project to mobilize the resources  we wanted not another extra well-written report, but an initiative that can channel the resources effectively, also where we can leverage our organizational capabilities in doing business under extraordinary circumstances

Regional Economic Integration Framework Slide 15 Industrial activities at the Estate (before disengagement)

Regional Economic Integration Framework Slide 16 Services & Infrastructure Services to be provided  Physical infrastructure quality will be at highest standards  Electricity  Telecom (ISDN lines, hosting and internet)  Easy access to major highway and to Ashdod  Logistics center  Banking and Insurance  Special Security Unit

Regional Economic Integration Framework Slide 17 Trade Facilitation PIFZ will be extra-territorial  Industrial Free Zone Status  Immune from Palestinian & Israeli regulations  Customs unit will be established at the Zone  Qualified Industrial Zone Privileges Duty and Quota Free Access to the US market –35% Local content requirement (can be from Israel & Jordan)  Free Trade Agreements with the EU Goods will move to/from the Ashdod Port  25 km North of PIFZ (in Israel)  Transit Passage en route to the Estate Plans to build airport and seaport in Gaza

Regional Economic Integration Framework Slide 18 Potential Investors New investors:  Those who want to re-export their Gaza production to third countries (Arab markets, EU, and the US)  Those who want to target the Israeli market Incumbent investors:  Palestinians  Israelis with partners from third countries (i.e. American, Turkish)

Regional Economic Integration Framework Slide 19 Our approach We are learning that there are two types of approaches to private sector development  Approach of international organizations: Problems are big. Too many impediments to doing business. So develop big projects, target big problems, allocate big resources.  Our approach is different. Making profits is key for sustainability of any endeavor. Finding creative shortcuts for removing the big impediments to doing business. (Save the day, create hope for tomorrow) Well-functioning public-private dialogue mechanisms Concrete and local projects. Interim solutions. (often times, interim is eternal) Engage in “transformational diplomacy”

Regional Economic Integration Framework Slide 20 Lessons being learned This is a region where ideal options are rarely feasible. (confidence gap and a whole range of political, ideological, historical reasons). Small steps are essential instead of long range plans.  Thinking through stages makes you focus on technical issues. (less political etc.)  Local solutions are essential. The ideal, then, is to look for interim solutions agreeable to all parties at every stage. Interim solutions strengthen confidence and bridge the gap.

Regional Economic Integration Framework Slide 21 Investment Process Flow Contact TOBB-BIS  offices to be established in Gaza & Israel soon  currently TEPAV is the executive agency Obtain a license from PIEFZA Two ways to start:  Lease land & build own facility & start  Lease facility & start

Regional Economic Integration Framework Slide 22 Capacity Building in Palestine Capacity building programs for the Palestinian chamber-system and organized industrial estate-related personnel in Turkey September, Training on issues such as:  Chamber management and income resources of the chambers  Turkish Chamber Quality System and Chamber Accreditation System  TOBB-Eurochambres Joint Projects  Promotion of International Trade Services  Arbitration and Chambers  Management of Organized Industrial Zones

Regional Economic Integration Framework Slide 23 TEPAV- Economic Policy Research Institute TEPAV became operational in December 2004 The objective is to create an independent research capacity for PSD and PPSD. Organized around three programs,  Economic Studies  Governance Studies  Foreign Policy Studies

Regional Economic Integration Framework Slide 24 Focus on the transformation process Developing policy tools for dialogues with the government  Investment Climate Assessment  Competition Environment Assessment  EU Impact Analysis (TurkMod) Raising the capacity of the local stakeholders to have more active roles  Local communication network for academics and journalists  Enhancing the policy making ability of local chambers Regional Integration  Industry for Peace Initiative  Eurasia Project

Regional Economic Integration Framework Slide 25 Contribution of TEPAV|EPRI to the economic transformation process Investment Climate Assessment (jointly with the World Bank)  determining the binding constraints to firm performance  providing policy recommendations for removing barriers to private investment Industrial Policy Document (jointly with the State Planning Organization)  Formulating Turkey’s industrial policy in accordance with the EU accession process Labor Market Studies (jointly with the Brookings Institution)  policy choices for converting the skills of the unemployed workforce  realigning the skills of labor with the needs of the private sector

Regional Economic Integration Framework Slide 26 To sum up Both Turkey and the region is undergoing a very important transformation process Private sector has important roles (different from those of the past) There is the need to manage the process effectively. We need:  Know what the process is about  Capacity to manage it Well functioning and integrated private sectors are central to peace