The agreement to pay 12.5 percent of the construction costs paves the way for Intel to build the second of two factories in Kiryat Gat, 40 miles southeast of Tel Aviv, the country's Finance Minister Avraham Shochat said. Intel's board has three months to confirm the building plans.
"It's a tremendous achievement for the state of Israel and its economy," Shochat said in a statement. The factory is expected to create 3,000 jobs in Kiryat Gat, which has struggled with high unemployment since textile plants closed in the 1980s. Shochat announced the agreement a day before Prime Minister Ehud Barak faces an election against Likud Party leader Ariel Sharon. Barak promised to create 300,000 new jobs when he was elected in 1999.
Intel originally asked Israel to pay 20 percent of the project's cost, and Israeli chief executive Alex Kornhauser warned there was "great worldwide demand" to build the plant in countries that offered better incentives. In June, Intel said it would spend US$1.8 billion to expand a plant in Leixlip, Ireland.
Israel paid 38 percent of the cost, or US$608 million, of building the first factory, which opened last year. The new plant will cost approximately US$3.5 billion, and the US$400 million figure is an estimate of how much Israel expects to contribute, the Finance Ministry said.
The factory will produce Intel's newest generation of microprocessor on 12-inch silicon wafers. The company, which has operated in Israel since 1974, has another chip factory in Jerusalem and development centers in Haifa and Omer.
In October, the government granted a US$250 million subsidy to Tower Semiconductor, an Israeli maker of custom-designed computer chips, to build a US$1.3 billion plant at its headquarters in Migdal Ha'emek, Israel.
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