I write this paper after hearing what is currently going on within the Nigeria Free Zone ecosystem, where FIRS and CUSTOMS are now signing MOU with NEPZA for the collection of VAT and Duties in the Nigeria FTZs. The question that now arises is “Where did we get it wrong? What is happening with Nigeria FTZ? Have we reverted to Industrial Part instead of Free Zones.?
An Overview of FTZs
Many developing countries have used free trade zones (FTZs) as a policy tool to promote industrialization and economic transformation. The World Development Report 2020 also recognizes the possibility of using FTZs to facilitate global value chain participation. According to the World Investment Report by the United Nations Conference on Trade and Development (2019), free zones (including all other types of zones) are used by more than 140 economies around the world, almost three-quarters of developing economies and transition economies. That number has proliferated in recent years, with at least 5,383 zones in 147 economies. Among those zones, most are multiactivity zones—industry-specialized zones and zones focusing on innovation, concentrating on more advanced emerging markets.
As a “high-risk, high-reward” instrument, the global results of FTZs in developing countries are quite mixed. Results vary significantly with some regions or countries (especially those in East Asia) in general being more successful, while others (especially those in Sub-Saharan Africa, Nigeria inclusive) struggle to make their zones work. Even in the same country, it is quite normal to have both successful and failed zones.
The mixed global results of FTZs clearly show that FTZs are not easy to get right. Successful FTZs usually take 5–10 years to bear results (World Bank Group 2021; AfDB 2015). In low-income countries, the results could take longer. Therefore, a prudent approach is vitally important. Even in the case where the FTZ approach is well justified, policymakers should approach FTZs with a clear objective, a long-term commitment, and a strong technical team.
As an industrial policy tool, FTZ is supposed to complement market forces by helping to overcome market failures, deficient industrial infrastructures (such as power, water, gas, telecommunications, and waste treatment) needed for industrial agglomeration, and poor regulatory and business environment.
There are typically two types of zones despite the many names they are given: Free Trade Zones and Industrial Parks. FTZs often involve a “special” legal and regulatory regime (including incentive regimes) and may be appropriate in case the main constraints are related to legal and regulatory issues that affect the business environment besides other constraints, such as land and infrastructures. In other cases, a simple alternative to FTZ is an industrial park, which does not require a special legal and regulatory regime. In such cases, an industrial park may be more appropriate because it involves less complex processes.
Policymakers should actively revise and consider lessons learned from successful FTZ programmes. Among those lessons learned, the key elements include; understanding the market demand and leveraging on comparative advantages; and, most importantly, ensuring that zones are “special” in terms of piloting reforms for a business-friendly environment and are reliant to various external shocks.
We have to be conscious of some negative lessons in planning, developing, and operating FTZs which should be avoided by all means. Some of these are:
Lack of strategic planning and demand-driven approach:International experience shows that effective zone programmes (such as those in China, Malaysia, Mauritius, and the Republic of Korea) are an integral part of an overall national, regional, or municipal development strategy and build on strong demand from business sectors. For public zones, governments need to clearly define the role and objectives of the zone initiatives in their overall economic development agenda and to conduct thorough planning that involves all the major stakeholders in the process. Such a process will help to build a consensus within the government and throughout the country or region, thus gaining broad support. UNIDO did all these for us as a country before establishing the first free trade zone in Calabar.
From an economic point of view, FTZ instrument is justified because of its possibility to complement market forces and to help deal with certain market and government failures. The important market and government failures that FTZs are intended to address would include deficient industrial infrastructure (such as power, water, gas, telecommunications, and waste treatment) needed for industrial agglomeration, and poor regulatory and business environment.
However, in many zones, even the basic infrastructures, such as power and roads, are not properly provided. A World Bank study (Farole 2011) of six African zone programmes (Ghana, Kenya, Lesotho, Nigeria, Senegal, and Tanzania) shows that the downtime in zones (measured by hours) because of power shortages is still quite high in absolute terms in most African zones despite some reduction compared with outside zones—on average, the reduction is about 54 percent in African zones versus 92 percent in non-African zones. Nigeria is worse.
Poor Policy and Legal Environment and Weak Implementation Policy:In FTZ programme, a predictable, transparent, and streamlined (not multiple or even self-contradicting) legal and regulatory framework is essential to provide protection and certainty to the developers and investors and to ensure the clarity of roles and responsibilities of various parties involved. Such a framework also helps to ensure that the zones attract the right investments and are implemented with proper standards. Strong, long-term government commitment provides an additional guarantee for the success of zones by ensuring policy.
However, in many low-capacity countries, especially those in Sub-Saharan Africa, the current legal, regulatory, and institutional framework for FTZs is either outdated or does not exist, and in some cases, zones have been launched or built without a proper framework in place.
Inability to mitigate the environmental and social risks:Because of the nature of FTZ projects, they often need to involve land acquisition and resettlement of displaced people. Therefore, it is indispensable in FTZ programmes and projects to properly identify and assess such risks during the feasibility study and to develop sound mitigation measures. Failing to do so may break such projects, which has been the case in some African countries. Example is the case at Lekki where Tunde Disu of Lekki World Wide, a good friend of mine, lost his life some years ago.
I have advanced the above overview to support my argument that NEPZA and OGZA has no reason, whatsoever, to sign an MOU with FIRS and CUSTOMS unless it has so been engraved in the amendment of the Free zone Act, outside which, any such action is illegal and can be contested in the law court and the court of public opinion. Such action is a blatant aberration of the tenets of Free trade zone.
All we should engage ourselves in now is how to grow the free trade zones in Nigeria to productivity. Few zones like Ogun Guangdong, Lekki zones, Onne etc are coming up successful. FTZ scheme is more likely to succeed if it takes an approach of reducing the most stringent barriers to growth and making sure that the benefit of zones outweighs their cost.
To assess the effect of the FTZ policy, and whether the policy has achieved its objectives, Monitoring, and Evaluation (M&E) programmes should be put in place not VAT, Withholding tax or duty payment on raw materials. Some investors of free trade zone seem to be comfortable with 5900 on computation and payment of duty on raw materials for production of goods to be sold in the customs territory. As far as I am concerned 5900 admittance is like bringing an ant infested firewood to your house. You should therefore not be surprise on the visit of lizards. This is because 5900 will naturally lead to payment of VAT and in dollar, and the Post Clearance Audit (PCA) of Customs.
The Act establishing free zones in Nigeria is very explicit on its operation. Until the Act is reviewed, any other contrary activity is illegal. I have always advised at management retreats that CEOs should not try to pursue harmony, instead, they should embrace healthy, productive conflict.
The major objectives behind FTZs in most low- and middle-income countries are to attract foreign direct investment (FDI), create jobs, boost and diversify exports, initiate the industrialization process of the economy, and generate inclusive growth. Signing an MOU with FIRS on VAT and WHT collection from zone investors is not the right approach now. Besides, anything of such is illegal and should not be encouraged, abetted, or supported. It is a blatant aberration and travestying.
The way we are going now, Nigeria Free Trade Zone is gradually being transformed to an industrial park. It is high time we imbibe the spirit of training the staff of the Free Trade Zones Authority, staff of zones, and staff of the allied agencies to learn more about free zone policy consideration for more competitive and inclusive growth. We need to learn more about doing FTZ/SEZ right, learn more about the rules of conducts of FTZ, or simply put, the guidelines of FTZs. We have to learn more how to promote the fact that it is time to review the FTZ Act. Free Trade Zone and not industrial park should be the practice in Nigeria if we want to experience growth.
Chris Okwy Ndibe
A freezone & communication consultant
