Consultant appraises strategies for successful free zones

0

by Chris Ndibe

Nigerian Consultant on Free Zones, Mr Chris Ndibe, has identified that location and management of free zones could be more successful if they were operated on a cost-recovery basis.
Ndibe, who drew from the operations of free zones in Nigeria, identified that the benefits of the zones depended on the extent to which the zones were integrated with their host economies.
In his book, “Understanding Free Zones Scheme: Nigeria Perspective’’, the author carried out an expose on the guidelines on zones development, policy framework, incentive framework, regulatory and institutional framework and highlighted why private sector driven free zones are better.
With more than 35 years of experience in free zone sector, Ndibe also shared, drawing from benefit of hindsight, the links between the free zones and local economies.
He therefore advised that free zones should not be viewed as a substitute for a country’s larger trade and investment efforts but a “tool in a portfolio of mechanisms employed to create jobs, generate exports and attract foreign investment – through the provision of
incentives’’,
Ndibe has decided to serialise the book every Thursday beginning from today touching on the guidelines for free zones development, policy and incentive frame works.
GUIDELINE FOR FREE ZONES DEVELOPMENT
Introduction
The way Zones are located, developed and managed has links with its success.
It has already been argued that management of Zones is enhanced
when they are operated on a cost-recovery rather than subsidised basis,
and are market-oriented and customer focused. This is best done when
Zone operation is undertaken by private sector
groups on a commercial basis, rather than by government organisations
which frequently are subjected to political pressures and funding
constraints.
One
of the clearest lessons learned from decades of Free Zones, particularly
EPZ development, is that Zones cannot and should not be viewed as a
substitute for a country’s larger trade and investment efforts.
They are one tool in a portfolio of mechanisms employed to create
jobs, generate exports and attract foreign investment – through the
provision of incentives, streamlined procedures and custom-built
infrastructure.
But maximising the benefits of Zones depends on the extent to which they are integrated with their host economies.
The
benefits of Zone development are suppressed when they are operated as
enclaves, but multiplied when they are accompanied by countrywide
economic policy and structural reforms that enhance the competitiveness
of domestic enterprise and facilitate the development of backward and
forward linkages (JP. Gauthier, 2004).
Guidelines for Zone Development
  1. Implement
    land use planning and zoning efforts in core Zone areas for industrial
    and commercial development to guide the actions of private developers.
  2. Develop
    Zone designation criteria in Free Zone law and implementing regulations
    to ensure that private Free Zones have the best topography, are well
    located (near population centres and transportation hubs),
    and minimise offsite infrastructure development expenditures by
    government.
  3. Establish
    a land use planning and infrastructure development unit in Zone
    regulatory authorities to ensure adequate planning and support of
    offsite infrastructure provision.
    Gauthier
    maintained that all types of Zones should be permitted, offering
    customised infrastructure, facilities and services tailored to the
    specific needs of target industries.
    But as far as possible, all Zones should have a common set of
    incentives and privileges, rather than duplicating and overlapping
    regimes which result in revenue loss.
    There
    is the final and unique case of Special Economic Zones (SEZs) or
    so-called ‘Large Format’ Free Zones which can have significant economic
    impact particularly in terms of exports and foreign investment. SEZs
    can also be very effective in promoting the diffusion of new policies,
    procedures and governance structures.
    Experience has shown that administering and regulating an SEZ
    regime is extremely demanding on governments, so SEZ development efforts
    should only be undertaken by those countries that have the
    institutional capabilities, expertise and commitment to
    make them succeed. EPZs and FTZs are less demanding.

     

    Policy Framework

     

    International
    experience suggests that the best policy and incentive framework needs
    to be streamlined, encouraging Zones to compete on the basis of
    facilitation, facilities and services rather than incentives.
    The key elements of a best practice policy framework include the following:

     

  • Concept
    of extra-territoriality – as defined in the Revised Kyoto Convention.
    Free Zones should be treated as outside the domestic Customs territory,
    but should be eligible for national certificates of origin
    and participate in trade and market access agreements.
  • Private
    Zone development – clear definition of private in terms of benefits,
    obligations, rights and public – private partnerships for Zone
    development.
  • Zone designation criteria – physical development standards and clear criteria for the designation of new Zones.
    The main issue is to guide but preserve the flexibility of
    individual Zone development proposals while optimising the impact on
    government funding for off-site infrastructure connections.
  • Eligibility
    criteria – the openness of a Free Zone regime is defined in terms of
    minimum export requirements and the types of activities and ownership
    forms permitted.
  • Labour
    regime – International experience strongly suggests that the long-term
    competitiveness of a Free Zone depends on the quality and productivity
    of its workers.
    To achieve this, it is important that labour regimes are fully
    consistent with ILO standards and obligations, but they should be
    defined within a flexible and liberal labour market regulatory
    framework.
Incentive Framework
Countries
are under pressure to offer a generous package of tax and duty
exemptions to provide a level playing field between competitors.
The package of fiscal incentives has become almost standardised among Zones internationally.
There is considerable evidence to suggest that some of these
fiscal incentives are ineffective and a drain on public resources, in
particular the use of tax holidays and other differentiated corporate
income tax regimes have been widely abused.
The
Free Zone Concept is been dynamic—always changing. In all countries that
are successful in operating the scheme, it will be that it is not
static; it changes to meet the needs, and changes with the economy.
Many zones have trimmed back their incentive benefits over time.
  • The following guidelines can be proposed for the design of a Free Zone incentive framework:
  • Introduction or reform of Free Zones’ regimes should be taken as an opportunity to rationalise corporate tax incentives.
    Best practice approach now is to have performance-based
    incentives in a country’s tax code rather than through special
    legislation such as the Free Zone Acts/regimes.
  • Incentive framework should be WTO compliant.
    This is best done by removing any export obligation and allowing
    Zone enterprise full access to the domestic market on a duty paid basis.

 

  • Zone
    regimes should be used to advance de-monopolisation and deregulation of
    telecommunications and other utilities where applicable.
    Countries like Jamaica and others have used their Free Zone regime to accomplish this.