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Latin American countries have a variable record when it comes to setting up special economic zones and providing an environment in which they can thrive. However, as Jason Mitchell finds, politicians are becoming increasingly aware of the advantages of SEZs and are acting accordingly.

Dozens of new special economic zones (SEZs) will be set up in Latin America during the next five years, specialising in services or in specific industries.

Brazil, the region’s largest economy, is heavily under-represented in SEZs by both regional and global standards. Some 25 free-trade zones (FTZs) are authorised to operate in the country but only three are in use: Ceará in the country’s north east; Rio Branco in the north west; and Piau, also in the north east.

Underperforming Brazil 

Brazil’s SEZ legislation offers tax and administrative benefits for the companies established in its FTZs but 80% of a firm's gross income must derive from exports. The national congress is expected to pass a new law in mid-2017 that will reduce this to 60%, creating many opportunities for companies that want to put more emphasis on the internal market. At the moment, the rules only allow for firms involved in manufacturing or industrial processes to be set up in the zones, but the new legislation will extend to companies that specialise in services.

“The Brazilian government realises that SEZs are the future of international trade and, in the coming years, practically every state in Brazil will have an SEZ installed,” says Mario Lima, president of the Ceará SEZ. “I think we will see international software companies set themselves up in the zones. They will be attracted to the FTZs, especially as they will have greater access to the Brazilian internal market in the future.”

Mr Lima adds that SEZs have major physical restrictions in Brazil, as they need good roads and access to airports to be able to transport the goods. However, the future zones specialising in services will only need internet communications to work effectively.

Colombia on a roll 

Since 2005, Colombia has had legislation in place for the development of SEZs that is unique in South America. Law 1004 allows for a single company to become an FTZ and permits a pre-existing plant to be re-designated as an FTZ.

Companies must commit to providing 500 jobs within a five-year period and to a minimum investment of $2m. In return, their corporate tax rate is reduced to 15% from the usual 34%. Companies are also exempt from customs duties and value-added taxes on imported materials.

Between 2005 and 2012, the number of FTZs in Colombia increased from fewer than 10 to 104. They are now scattered throughout the country and have produced 230,000 direct jobs. 

“In Latin America, I think we will see many more SEZs with specialisations,” says Juan Pablo Rivera, who is the president of the Association of Free Zones of the Americas, which is the main trade association for SEZs in Latin America, and the president of ZFB Group, an SEZ based in Bogotá. 

“I don’t think we will see zones [with multi-purpose areas] in the future. More and more will be set up to host specific clusters in manufacturing or services. We are already witnessing this with pharmaceutical and medical devices clusters in FTZs in Costa Rica and the Dominican Republic, respectively, for example,” he adds.

FTZ rethink 

Mr Rivera adds that many countries in the region – which has a total of more than 400 zones – are examining their FTZ regimes to make it easier for zones to be established and then flourish. Countries re-examining their FTZ strategies include Peru, Argentina, Brazil, Uruguay and Paraguay. 

Zonamerica, an FTZ based in Montevideo in Uruguay, is opening a new 173,000-square-metre SEZ in Cali in Colombia, expected to be operational by the end of 2017. It will specialise in professional and financial services. 

“In Colombia it makes more sense to set up an SEZ that specialises in services because the country is mountainous, making manufacturing and logistics a challenge,” says Isodoro Hodara, vice president at Zonamerica. “Furthermore, there can be more workers per square metre and the surface area can be more intensively used.” 

Mario Tucci, founding partner at MVD Consulting, a Montevideo-based business consultancy ,says Latin America’s services sector is already expanding rapidly, growing to 9% of the global services industry today from 6% in 2014. More than 100,000 jobs have been created in this time and 70% of these are located in SEZs. 

“In Latin America, services-orientated SEZs are the new model,” he adds. “Increasingly, people will work from highly sophisticated zones in comfortable offices and in pleasant surroundings. The zones will be focused on global services and English will be widely spoken. 

“Future zones will centre much more around human talent. I think we will see some highly specialised zones, for example, in film-making or TV studio production.”

This article is sourced from fDi Magazine
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