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Consultant appraises strategies for successful free zones


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.