History of Africa Free Zones Association

Overview of the scheme

FREE ZONE DEFINITION

A Free Trade Zone is an industrial area within a geo-political area of a country which is considered the Customs territory for fiscal exemption and other incentives.  Various economic and commercial activities which are export-oriented are encouraged within the area.  The activities include but not limited to manufacturing, processing, assembling, banking, insurance, warehousing etc.

It can also be defined as a strategy for economic development usually characterized by a special regulatory and incentive regime, often in an enclave clearly delineated and administratively thought of as being outside a nation’s Customs and trade regime to attract both local and foreign investment.  The special regulatory and fiscal regimes allow for freedom of operation at competitive costs.

The concept of Free Trade Zone is very powerful, that is why more and more countries are recognizing a new paradigm of Free Trade Zones. While the old Free Trade Zone was often described as a static, labour – intensive incentive driven, exploitive enclave, the new zone paradigm is more dynamic, investment – intensive, management – driven, enabling and integrated economic tool.

The concept is equally not a new one.  It is almost as old as western civilizations, having existed in the Phoenician city of Tyre about 300 BC in the Greek Island of Delos, which by implication became one of the wealthiest islands in the world for nearly a century. For many years sovereigns have expressed concern about the implications of Free Trade Zones, the Romans even made efforts to suppress them as destructive to the centralism of the Roman Empire just as it is today seen with many agencies of government in Nigeria trying to suppress the Free Trade Zone Scheme on the ground that government is loosing revenue.

The concept is one of many trade policy instrument used to promote non-traditional exports.  Other such instruments include but are not limited to import tariff drawn back arrangement, temporary admissions and export subsidies.

However, the Free Trade Zones of today are quite different from the Free Zones of the past.  Although they still serve a largely similar purpose, they have grown increasingly complex and are thus involved with an increasing volume and variety of economic transactions.  Contrary to the view of the trade bureaucrats and liberal trade economists, the liberalization of trade has not eliminated the need for Free Zones, but rather expanded their role.  As globalization takes hold, the formation of Free Zones Continues at an increasing rate (Robert Haywood, 2000)

Free Zones have existed for several centuries.  They were established to encourage Centre pot trade, mostly in the form of citywide Zones located on international trade routes.  Examples include Gibraltar (1704), Singapore (1819), Hong Kong (1848), Hamburg (1888), and Copenhagen (1891).  Modern Free Zones are variants of these traditional, commercial Zones. The principles underlying the basic concept of a Free Zone include:

  • Geographically delimited area, usually physically secured
  • Single management/administration
  • Eligibility for benefits based upon physical location within the Zone
  • Separate Customs area (duty-free benefits) and streamlined procedures.

The fundamental concept of a Zone is that it is an alternative policy framework, developed by government, to promote policy objectives of government.  Sometimes this involves a specified geographical region, but just as often it involves a specific industry such as banking or insurance, or companies with some common behavior such as export orientation, high technology content.

Free Trade Zones are generally established within a single country, although there are few example of cross border zones, where free trade areas are established between countries. Regional free trade areas present control issues which, are similar to those between states in large national territories, and what were previously customs issues often fall to domestic police forces as border checks are eliminated.

The core definition of a Free Trade Zone and proposed guidelines and standards are contained in the Revised Kyoto convention of the World Customs Organisation (WCO).  The Annex D of the international convention on the Harmonization and simplification of Customs (revised in 1999), defines a Free Zone as ‘”part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory … and not subject to the usual customs control”.  Kyoto convention and the accompanying guidelines provide standards and recommendations on the treatment of imports to and exports from free zones including territorial limits (free zones are defined as “outside the customs territory” for the purposes of the assessment of import duties and taxes); minimal documentation requirements; and issues to be covered by national legislation. 

Free zones typically shares a few common features; allow for duty – and tax free imports of raw and intermediate materials and, in many cases, capital equipment necessary for the production of exports, less government red-tape.  More flexibility with labour laws for the firms in the Zone than in the domestic market; generous and long-term tax holiday and concessions to the firms; above average (compared to the rest of the host country) communications services and infrastructures.

It is also common for countries to subsidize utilities and rental rates; Zones’ firms can be domestic, international or joint venture.  The role of FDI is prominent in Free Zone activities.

VARIANTS OF FREE ZONES SCHEME

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) support 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 public or privately owned, medium or small scale export oriented firm or group of industries with Free Zones status.  The variants are:

  • Free Trade Zones, also known as Commercial Free Zones and Free Commercial Zones are small, fenced-in, duty-free areas, offering warehouses and other storage facilities for trade, transshipment and re-export operations, located in most parts of 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.
  • 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 specializes 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 Zone 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.

  • Science & Technology Parks (STPS)

“A Science Park is an organisation managed by specialized 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, R&D 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. Assoc. of Science Parks).

This definition encompasses not only the different models currently existing in the world, but also other labels and expression such as technology Park, Research Park, Techno pole which have a social purpose, since every changes, and nothing is permanent (the dialectical nature of innovation).

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 (STPs) 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 a Science & Technology Parks (STPS) is to help companies to become more innovative and therefore, more competitive and to increase the economic level of their region or municipality.  In today’s global economy, the key words for economic success are technology, R&D, and knowledge management, and most of all innovation.

  • Enterprise Zones are intended to revitalize distressed urban or rural areas through the provision of tax incentives and financial grants. Most of this Zones are in developed countries like USA, France and UK, although South Africa is developing similar schemes.
  • 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 provide a much broader set of incentives and benefits.
  • Single Factory EPZ Scheme (Export Processing Factories) offer EPZ incentives to individual enterprises regardless of location; factories do not have to locate within a designated zone to receive incentive and privileges. Single factory EPZ 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 Figi, countries like Costa Rica, USA and Sri Lanka allow both industrial estate-style Zones and single factory designations.  Nigeria started and licensed about 23 EPF, but cancelled to Customs MIBS after a long debate with Nigeria Customs on the existence of such Programme.  THE Export Processing Factory or Single Factory Export Processing Zone usually benefit from the following:-
  1. Unlimited duty-free imports of raw, intermediate input and capital goods necessary for the production of exports.
  2. 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.

  1. The firms can be domestic, international on foreign ownership of the firms or on the repatriation of the profits.
  2. Just like EPZs/FZs firms, EPFs can be differentiated by their ability to sell their output (in part or whole) in the market of the country.

Other types of Free Zones are:

  • Customs/Fiscal depot
  • Offshore Finance Centre (Monetary Free Zone)
  • Tourist and educational Free Zone
  • Logistical & Transship Free Zone

It is frequently pointed out that Free Zones have also evolved into highly specialized 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 specialized 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 specialized 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 than the regulations 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 following 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; if 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 much 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.  They 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 kilometers and they can have resident populations that number in the millions.  The Chinese Special Economic 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 Special Economic 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 organized 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 problem.  Nevertheless Special Economic 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-emphasis 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 real extent the free zone is a more controlled environment and has high propensity of leading countries in their search for appropriate regulation and expected international behavior, 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 of the zones and even 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.