The past few years have proven a turning point for free trade zones (FTZs). More policy-makers around the world have recognised the benefits and are launching their first FTZ programmes. New initiatives are also being rolled out by international organisations, such as the Unctad-led Global Alliance of Special Economic Zones, which aims to advance a new generation of zones in line with sustainable development targets. Another is the OECD’s certification scheme for clean free trade zones, which was developed to support transparency in FTZs and is framed as part of the broader effort to counter illicit trade.

Their efforts are well-timed. Data tracked by greenfield FDI monitor fDi Markets shows that private sector demand for FTZs has never been stronger. 

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Measured by both project number and capital expenditure (capex), announced FDI into free zones around the world hit a record high in 2022. Over the course of the year, foreign investors announced 591 FTZ projects worth a whopping $84.12bn. That capex figure eclipses the previous record of $48bn, which was set just one year earlier. Based on data from the first seven months of this year, 2023 is on track to post about 700 FDI announcements, which would set another new benchmark for project numbers. 

Taken as a whole, these figures suggest that since the Covid-19 pandemic, FDI into free zones has entered a new era. Over the past two-and-a-half years, FTZs have recorded more FDI capex than over the previous five years combined. It shows they have shrugged off the lingering effects of the pandemic quicker than the broader FDI universe. This strong performance supports widely-held views that free zones, with their ready-made facilities and ease of business set-up, are well-placed to benefit from the reshoring and nearshoring trend which was accelerated by Covid-19’s disruption of supply chains. 

Projects big and small

Mega projects were the key distinctive feature of FDI into free zones in 2022, when the average project value announced by foreign firms was $142.3m. This is the second highest average on record and was boosted by a record 14 investments valued at $1bn or more. Ten of these are green hydrogen and green ammonia projects destined for Egypt’s Suez Canal Economic Zone, which were announced amid the excitement of the country hosting the UN’s COP27 climate change conference. They include a $13bn pledge by India’s ACME Cleantech Solutions, an $11bn pledge by UK-headquartered Globeleq and an $8bn pledge by India’s ReNew Power Ventures.

Preliminary data for 2023 suggests it is too early to herald the beginning of the free zones’ megaproject era. As of July, only two $1bn-plus investments had been announced, and the average deal size has shrunk to a decade low of $49m. While 2022 was defined by mega projects led by large industrial players, this year is being dominated by smaller deals involving more companies. It is these firms that put free zones on track to see their number of announced FDI projects reach a new record by the end of this year. 

A diversifying landscape

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A similar distinction between 2022 and 2023 emerges when looking at the sector breakdown. The wave of green fuel announcements in Egypt last year pushed total renewables investment in free zones to $60.7bn, accounting for 72% of total FDI announcements into free zones. The next biggest sector recipients were electronic components and metals, which received $8.7bn and $2bn respectively. 

Yet over the first part of this year, renewables accounted for just $578m of announced FDI into free zones. A broader range of sectors are upping their commitments. Between January and July, the biggest sector recipient, measured by capex, was metals, which attracted $9.32bn, more than any full year on record. That is partly down to China-based Baowu Steel Group’s plan to establish a metal plate manufacturing facility valued at $4bn in Saudi Arabia’s new Ras Al-Khair Special Economic Zone. After metals, 2023’s biggest sector recipients to date are communications, transportation and warehousing, and real estate.

Looking at the mix of business activities, manufacturing continues its historic dominance when measured by capex. However, since the beginning of 2022, in terms of project numbers it has been trumped by both business services and sales and marketing and support activities. During this period, free zones have registered 316 business services announcements, 252 sales, marketing and support announcements, and 213 manufacturing announcements. This is indicative of the more diverse mix of FTZ business models, with an increasing number of operators developing office space to lure high-added-value services and diversify their offering. 

In terms of where they are being drawn to, Egypt and Indonesia’s free zones have attracted the most foreign capex since the start of 2022. Thanks to a handful of megaprojects, they have drawn commitments valued at $62.1bn and $11.4bn, respectively. But when it comes to individual project numbers, the UAE’s suite of free zones continues to be favourites among investors. Since January 2022, the Emirates’ 40-plus free zones have drawn 585 project announcements, more than double its nearest competitor Qatar (80 projects), which is followed by Costa Rica (45 projects). 

Staying power

This increasing number of projects and investors, coupled with a broadening base of sectors and activities, bodes well for the industry’s growth trajectory.

However, 2024 will be a pivotal year for the free zone community. From January, EU members will start implementing the 15% global corporate minimum tax that has been championed by the OECD and is backed by more than 130 governments. The hope is that the EU’s first move will trigger a domino effect and prompt others to join, although notably the US administration has not yet taken similar steps. 

Free zones that offer corporate tax breaks to their tenants are expected to benefit from a sunset clause to smooth the transition to the new regime. However, many details about the mechanics of the reform, which applies to multinational corporations with annual revenues above €750m, have yet to be tested. 

Many within the industry say the impact will be marginal, pointing to the fact that the reform captures only the biggest companies and that investors cite non-fiscal benefits as free zones’ biggest draw. More will become clear as the reform is implemented around the world. Yet as an industry that quickly shook off the effects of the pandemic, FTZs seem in good stead to take on yet another challenge.

Free Zones Awards 2023

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