Latest Post

VARIANTS OF FREE ZONES SCHEME by Chris Okwy Ndibe



Jean-Paul Gauthier (2004) stated that this generic Free Zone concept has evolved over time, resulting in large variety of Zones with differing objectives, markets, and activities.  When discussing Free Zones, a variety of terminologies are used interchangeably through most of the literatures, Johansson (1994) supports such a clustering, arguing that the general concept of all these terminologies are basically the same.  The name of a Free Zone is often based on ownership, structure of production and functions of the Free Zone.  It is either public or privately owned, medium or small scale export oriented firm or group of industries with Free Zones status.  The variants are:
v  Free Trade Zones, also know as Commercial Free Zones and Free Commercial Zones, are fenced-in, duty-free areas, offering warehouses and other storage facilities for trade, transhipment and re-export operations, located in most parts of country entry around the world.  Leading examples are the Colon Free Zone in Panama, Jebel Ali Free Zone in UAE and Calabar Free Trade Zone in Nigeria., Tema in Ghana.
v  Export Processing Zones are industrial estates offering special incentives and facilities to manufacturing and related activities aimed mostly at export markets.  The World Bank (1992) defined EPZ as “an Industrial Estate, usually a fenced-in area of 10 to 300 hectares that specialises in manufacturing for export.  It offers firms free trade conditions and liberal regulatory environment.” The traditional ‘pure’ EPZ model is where the entire area within an EPZ is designated for export-oriented enterprises licensed under an EPZ regime.  Hybrid EPZ in contrast are sub-divided into a general one open to all industries regardless of export orientation and a Separate EPZ area reserved for wholly export-oriented EPZ enterprises. In most Asian countries, like Thailand and the Philippines, EPZ areas within hybrid zones are fenced-in.  In many Latin American countries – like Costa Rica and Mexico – EPZ registered enterprises may be located in the same area as firms registered under other regimes.
v  Science & Technology Parks (STPS)
“A Science Park is an organisation managed by specialised professionals, whose main aim is to increase the wealth of its community by promoting the culture of innovation and the competitiveness of its associated businesses and knowledge-based institutions.  To enable these goals to be met, a Science Park stimulates and manages the flow of knowledge and technology amongst Universities, Research & Development institutions, companies and markets; it facilitates the creation and growth of innovation-based companies through incubation and spin-off processes; and provides other value-added services together with high quality space and facilities” (Int. Association of Science Parks).

This definition encompasses not only the different models currently existing in the world, but also other labels and expressions such as Technology Park,  Research Park, Technopole which have a social purpose.

By creating a favourable climate for innovation, countries and regions will allow their industries and companies to become stronger, to make more profits and to generate more employment.  And by doing so, they will reach their most important objective in economic and industrial policy: to increase the social welfare and the level of life of their citizens.  Science & Technology Parks  have proved to be very powerful elements for regional development, provided the adequate model is chosen for a given region or city.

The main aim of STPs is to help companies become more innovative and therefore, more competitive and to increase the economic standing of their region or municipality.  In today’s global economy, the key words for economic success are technology, R&D, knowledge management and most of all Innovation.

v  Special Economic Zones (SEZ) are a much broader concept – typically encompassing much larger areas; accommodating all types of activities including tourism, retail sales; permitting people to reside on site, and providing a much broader set of incentives and benefits.

v  Single Factory EPZ Scheme (Export Processing Factories) offer EPZ incentives to individual enterprises regardless of where they are located; factories do not have to locate within a designated zone to receive incentive and privileges.  Single factory zone programmes are similar to Bonded Manufacturing Warehouse Schemes, although typically offering a broader set of benefits and more flexible controls.  Leading examples of countries relying exclusively on a single factory scheme include Mauritius, Madagascar, Mexico and Fiji.  Countries like Costa Rica, USA and Sri Lanka allow both industrial estate-style Zones and single factory designations.  Nigeria started and licensed about 23 single factoryzones, but cancelled to Customs MIBS after a long debate with Nigeria Customs on the existence of such a programme.  The Export Processing Factory or Single Factory Zone usually benefits from the following:
       I.            Unlimited duty-free imports of raw, intermediate input and capital goods necessary for the production of exports.
    II.            Less governmental red-tape including more flexibility with labour laws for the firms         
 III.            Generous and long-term tax holidays and concessions to the firms.
 IV.            The firms can be domestic, international on foreign ownership
    V.            On the repatriation of the profits, there is no restriction.
 VI.            Just like EPZs/FZs firms, EPFs can be differentiated by their ability to                                      sell their output (in part or whole) in the local market.
v  Enterprise Zones are intended to revitalise distressed urban or rural areas through the provision of tax incentives and financial grants.  Most of these Zones are in developed countries like USA, France and UK, although South Africa is developing similar schemes.
Other types of Free Zones are:
v  Offshore Financial Centre (OFC): is a low-tax jurisdiction that provides corporate and commercial services to non-residents in the form of offshore companies’ investment of offshore funds. In general, OFC include all economics with financial sectors disproportional to their resident population. It means that financial services offered to non-residents in OFC are on a scale that is disproportional with the size and the financial services offered to non-residents in OFC are on a scale that is disproportional with the size and the financing of its domestic economy.
v  Customs Depot/bonded warehouse: This a building or other secured area in which dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty. Upon entry of goods into the warehouse, the importer and warehouse proprietor incur liability under a bond. This liability is generally cancelled when the goods are:
-       Exported or deemed exported;
-       Withdrawn for supplies to a vessel or aircraft in international traffic;
-       Destroyed under customs supervision;
-       Withdrawn for consumption domestically after payment of duty.
While the goods are in the bonded warehouse, they may, under customs supervision, be manipulated by cleaning, sorting, repacking or otherwise changing their condition by processes that do not amount to manufacturing. After manipulation, and within the warehouse period, the goods may be exported without the payment of duty, or they may be withdrawn for consumption upon payment of duty at the rate applicable to the goods in their manipulated condition at the time of withdrawal.

v   Tourist and Educational Free Zone: this deals with attracting schools and universities to the zone, the same quality of higher education institutions that are available in other parts of the world. They must be able to provide a more cost effective tuition fee to the population because they are offered incentives allowing them to keep their operating costs much lower than anywhere else.
v  Tourism and Business Resort
It is frequently pointed out that Free Zones have also evolved into highly specialised facilities, configured to the needs of specific industries and activities.  There are special zones to promote high technology- or science-based industries; petrochemical and heavy industry zones relying on cheap energy sources and specialised facilities; offshore financial services zones to promote offshore financial and non-financial activities; software and ICT Zones accommodating software coding and other offshore IT Services operations, airport-based zones, specially support aviation and air-based activities; logistics parks, cargo villages/cities, providing specialised facilities and support services to facilitate trade, supply chain management and logistics; tourism zones to facilitate integrated resorts and leisure community development, and others.   

It is important to note that free zones are not free after all.  They are regulated environments in which the regulations are different from those in the rest of the national economy.  In most cases, the rules are more liberal, though ironically in many cases they are effectively more controlled environments and often follow the rules of law more closely than the rest of the economy. 
For example, while many industrial zones have no duty charged on imports or exports, they are tightly controlled by customs to prevent smuggling into the domestic customs territory.

Free Trade Zones are increasingly not only about trade but rather about investment, industry, research and development, services, education, training and logistics.  In other words Free Zones are about everything in the modern economy.  Many Free Zones are not about confined territories, but may cover entire country, or specific industries.  Robert Haywood classified most of the countries known as tax havens as industrial specific Free Zones.  Though there are others, New York has an insurance Free Zone; whereby the premium payment is sufficiently large (say over $100,000), then the state insurance laws do not fully apply.  It is assumed that an individual paying that much in premium can protect his own welfare better than a State Insurance Commissioner. Performance specific Free Zones allow individual factories to receive Free Zone benefits, provided they meet certain conditions.  In the past these have normally included export requirements, use of local materials, but more recently they have included technical skill levels and employment commitments.

A Zone may be both small in scale and restricted to industry or performance criteria.  A Typical Export Processing Zone is just such a small scale export industry zone.  The small scale Zone is what we typically think of as a Zone, and does not present any extraordinary difficulties in either understanding or regulation.  It may cover up to a few square miles or a few thousand hectares.  Most are between 50 – 500 hectares.  The wide area Zone, on the other hand, is quite different.  One covers several thousand square kilometres and can have resident populations that number in the millions.  The Chinese Free Trade Zones were some of the first wide area zones and have been such spectacular successes that they have led to a number of attempted duplications.

The Chinese Model of Free Trade Zone has been successful because of the powers and independence of these zones in China. The Chinese Special Economic Zones have both legislative, executive and in some cases, even judicial functions.  They are organised along the lines of an autonomous province or state.  For example, most Special Economic Zones have their own customs service, tax collection system and even department of foreign affairs. 

This independence has allowed some of the zones to succeed, but not without leaving the control of activities in the zones with serious regulatory problems.  Nevertheless, Free Trade Zones are perhaps the most effective development tools ever created.  Many have growth rates in excess of 20% per year and have doubled their population income every four years for more than a decade.

From the above, it is important to re-emphasise that Free Zones are a product of the countries that created them.  They are fully accountable to and controllable by, the countries that created them.  To a large extent, the Free Zone is a more controlled environment and has a high attraction for leading countries in their search for appropriate regulation and expected international behaviour, attracting investments from legitimate businesses that may fear a more lawless or docile domestic environment. 

Free Zones are a problem only in those states that are also a problem outside the zones and may be a solution to some problems even then.  Different regulations may not be inferior, but rather superior to a system that has failed the rest of the country.