Many developing countries, having seen the success of free zones and export processing zones elsewhere, are planning to open special economic zones, the new and modern concept of free zones. This they see as an opportunity to attract foreign investment, increase employment, acquire technology and boost foreign exchange revenue.
What is a free zone? Put simply, it is a tax regime, under which any project or activity can be progressed and developed, including: imports, exports, trade, commercial services, capital transactions, personnel, infrastructure, production and assembly procedures, and logistics.
Femoza, The World Federation of Free Zones, is often asked to give advice on the planning process. However, some countries have proceeded with their planning based mainly on visits to successful free zones. Such visits are of limited value because free zones are not going to reveal all their plans and strategies to a future competitor.
In this article, we look at the most frequently seen errors in the free zone planning process. Many planners do not use the sophisticated financial analysis techniques that test out the real feasibility of an investment in an industrial park and its concomitant free zone construction, operating costs, staff training and general overheads (see as example the United Nations Industrial Development Organisation [Unido] Manual for the Preparation of Industrial Feasibility Studies).
Sometimes governments base decisions on political rather than economic reasoning. This can lead to faulty and unrealistic budget setting. It can also lead to poor site selection – even though location is the most important consideration. Furthermore, business plans often fail to reflect realistic cost-revenue streams over the first two to 10 years.
Key policy decisions
There are several basic planning matters that are essential to the success of any free zone authority:
- Real autonomy for the free zone’s chief operating officer (CEO). The CEO must have genuine full authority and should not have to refer major decisions to a higher authority, providing that they work within the budget established by the government.
- The CEO must be a person of considerable commercial and/or industrial management experience with an open private sector mindset. Civil servants from the public sector rarely succeed or they have more difficulties as free zone CEOs.
- The board of directors must include government members at ministerial level and experienced business people from the private sector.
- In the interests of departmental co-operation, the government members should include officials from the ministries of finance, transport, aviation, labour and planning.
- Although titular board members are ministers, they can delegate to a senior official to attend most meetings.
Deviation from these general principles can lead to management failings and disputes later in the establishment phase and in the operational phases.
Other planning errors that frequently arise include:
- long-term plans and layouts for transport, warehouse storage, container parks and vehicle parking not linked to national development plans;
- overexpenditure on too many factory buildings in the first two years;
- wrong factory building design;
- wrong layout of free zone factories, offices, custom posts and roads;
- investment incentive package not aligned with World Trade Organization/EU/US trade regulations;
- promotion of free zone not based on state-of-the-art electronic technology; overexpenditure on public relations events and printed publicity materials;
- unrealistic services package offered to investors;
- free zone staff paid as civil servants instead of on a free market basis with bonuses and promotion on merit, not length of service;
- excessive fees demanded from investors for basic services within a free zone;
- potential investors on first visit not given serious treatment;
- market research staff not fully trained in state-of-the-art methods of contacting potential new investors;
- customs officers incorrectly retrained within the concept of a global economy to deal rapidly with large volumes of containerised traffic both imported and exported.
There are many factors that can result in either very slow progress in attracting free zone investors or a complete failure. Unfortunately, there have been many examples of failure, which results in considerable financial loss. Such failure also damages the international reputation of the country concerned. As a result, it will take many years of renewed planning to regain investor credibility.
Peter Ryan is vice-president of Femoza, the World Federation of Free Zones.
The World Federation of Free Zones is a non-governmental, non-profit organisation.
It was constituted in Switzerland in December 1999 under the laws of the Geneva canton and the relevant clauses of the Swiss civil code.
Its objective is to further free zones around the world and to help them to develop, especially in emergent countries and countries in transition.
Femoza’s functions are to offer experience, to issue norms, rules and processes, to train professionals and to assist with technical, juridical and economic support.
Its methods are based on the promotion of conferences and workshops, the maintenance of a constant line of communication with and among its members, as well as regular meetings with international institutions and financial, social and environmental institutions.