Free Trade Zones – Learning From Global Experiences

Ganesh Rasagam Lead Private Sector Development Specialist World Bank Douglas Zhihua Zeng Sr. Economist, World Bank

AFDC “FTZ Seminar” Shanghai, June 2014

What is Free Trade Zone? FTZs, also known as free commercial zones,

are a sub-category of special economic zone. They are fenced-in, duty-free areas, offering ware-housing, storage, and distribution facilities for trade, transshipment, and re-export operations, without the intervention of the customs authorities.

Free-trade zones are mostly organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade.

A Taxonomy of Zone Types

Worldwide, enormous variety exists in Zones

Programs. Most fall under these common

headings

Industrial Estates

(No Fiscal Incentives)

Incubators

Bonded Warehouses

Free Trade Zones and

Export Processing

Zones

Single Factory Zones

Freeports

◦ Results of the demand analysis will suggest one or more appropriate types of SEZ to pursue.

◦ Many countries offer more than one type of SEZ, offering both industrial estates and free trade zones for instance.

◦ More expansive solutions like Freeports are generally considered only in parts of the country with a unique comparative advantage, such as a major port.

◦ Which solution is the “right” one will depend on the unique strategic and development goals of the conflict-affected country.

Why FTZs?

The FTZ regime seeks to provide an enclave of favorable conditions that: ◦ Reduce business transaction costs; ◦ Promote investment; ◦ Facilitate trade; ◦ Spur employment generation; and ◦ Pilot certain economic/policy reforms

The First Modern FTZ in the World The FTZ concept appeared at least 2000 years

ago. The modern concept of a free trade zone was

born in Shannon, Ireland, in the 1950’s when the Irish Government granted liberal policies to the industrial area adjoining the Shannon Airport.

The main rationale was to establish a “growth pole” in the economically distressed southern part of the country.

The policies adopted in Shannon were upgraded & extended throughout Ireland over the next 30 years, and turned Ireland into the “Celtic Tiger” in the 1990s.

Overview of Global SEZs

30 Countries 120+

80 Zone Projects* 2,000 +

0 Private Zones** 1,200+

$6 billion Total Exports $600+ billion

1 million

Direct Jobs 68 million, China alone 30+ million

*By 2004, over 1,000 FTZs in over 100 countries. **This figure does not include single-factory zones. With them included, the total would exceed 3,000 zones.

• The segregated data on FTZs only is hardly available. Here are the total figures of SEZs.

Special Economic Zones (SEZs): A Practitioner's Guide

SEZ Distribution by Region

Source: Data from ILO, WEPZA, and Bearing Point and updated by the IFC (2007)

7

Objectives Promotion of exports Promotion of FDI Policy Features Duty-free Area - 70-80% export requirement Manufacturing-oriented: Neglected services, intermediaries, logistics Tax Holidays Limited or no selection or performance criteria

Institutional Features Zone Authority owns, operates, regulates the zone Zone funded by government; typically subsidized services & facilities Zone Authority exerts little power over or collaboration with other government bodies Separate Customs Area, recognized by Kyoto Convention Development Approach Limited or no demand analysis Public sector develops, manages, and regulates Public subsidies of services & facilities Political influence (no clear background analysis) on site selection

Traditional FTZ Concept

Main Issues With the Traditional Concept?

Public sector development of zones (lack of private sector participation)

Inadequate institutional structure

Uncompetitive policies

Lack of an integrated development approach

Limited focus on improving the investment climate

9

FTZ Example:

Colon (Panama) Free Zone A large zone near the Atlantic entrance to the

Panama Canal, dedicated to re-exporting a wide variety of merchandise to LAC.

It is a free port, the largest such port in the Americas and second largest in the world.

It started operations in 1948 and occupies about 2.4 km2 (600 acres).

It is divided in two large areas: one located in Colón, segregated from the city by a wall, and the other relatively new, in the harbor area, which is designated for warehouses, covering 0.53 km2 (130 acres) and 370 m (400 yards) from Colón's commercial sector.

Achievements of the Colon Free Zone

With 2,200 companies, 19,000 employees, the Zone generated imports and re-exports valued at over US$29.2 billion in 2011, amounting to almost 97% of the Panama GDP.

Investors are able to harness the services and facilities offered by the free zone for importing, storing, assembling, repacking, and re-exporting products from all over the world.

Main products include electrical appliances, pharmaceutical products, liquor, cigarettes, office and home furniture, clothing, shoes, jewelry, and toys.

Considered the "trading showcase" of Central and South America, as well as of the Caribbean region.

Success Factors of the Colon Free Zone

Strategic location: located directly on the Panama Canal, goods can reach the Pacific or Atlantic coasts directly, making it an ideal trading hub.

Sound legal and macro environment: Panamá has laws that protect the industrial and intellectual property rights and applies strict sanitary and health regulations for FTZ. The country also enjoys macro-stability.

Conducive business environment: positive ratings as a business friendly location for the past few decades; businesses enjoy tax and duty exemptions for imports and exports, and easy registration – no commercial licensing and minimum capital required.

First class infrastructures: besides the expanded canal and modern port facilities, there are well-maintained railways, highways, and airport.

Easy access to various business services in the FTZ: banking, insurance, reinsurance, shipping, transit, communications and other logistic services are easily available.

Regional trade liberalization, especially through the NAFTA.

Medan

Bangkok

Jakarta

Hong Kong

Singapore

KL

NEW TOWNSHIP INDUSTRIAL PARK

CITIES/TOWNS EXISTING ROAD RAILWAY

KEDAH

Beach Resorts

PENANG ISLAND

Penang International Airport

Bayan Lepas Industrial Park

Batu Kawan

Bukit Minyak

PRAI

Kulim High-Tech Park

Taipei

Malaysia’s first Free Zone was established in Penang in 1972: political vision and leadership, port, airport and basic infrastructure in place, educated workforce, attractive living environment and tourist destination

FTZ Example: Penang (Malaysia) Free Zone

Source: Ganesh Rasagam, 2011

Key Outcomes

1970 2010 Population (‘000) 0.78 1.61 Per capita income (US$) 400 5600 Unemployment rate (%) 16 3 Poverty rate (%) 32.3 0.3 Infant Mortality Rate (%) 38 0.4

Source: Ganesh Rasagam, 2011

Development of the Penang FTZ Over 40 Years

0

500

1000

1500

2000

2500

1960 1970 1980 1990 2000 2010

No. of firms

Employment (00)

250,000 direct jobs and 1,500 firms over 40 years

30% of Malaysia’s exports and 50% of electronics exports

Source: Ganesh Rasagam, 2011

Key Success Factors of the Penang Free Zone Zone program is part of the national development policies:

from 2nd to 5th Malaysia National Plan (1970-1990), free zone-led manufacturing had been the centerpiece of the plan, and the Penang Master Plan also fully reflected this priority

Sound legal framework: Free Trade Zone Act (1971); Free Zones Act (1990) and Free Zones Regulations (1991)

Enabling role of the Penang Development Corporation (PDC): Lead agency for strategy, planning, communications, intra-agency coordination and consensus building; Business facilitation; Regular dialogue with investors: address concerns related to infrastructure, regulations, permits, customs, etc.: Investment promotion; and Facilitating innovation, entrepreneurship and industry-academia partnerships and skills development

Source: Ganesh Rasagam, 2011

Value Add

FTZ Example:

Jebel Ali (Dubai) Free Zone: Eco System Business Center Offices

Warehouse Standard

Warehouse Build to Suite

Infrastructure Ready Land

Company Registration Licensing

Facility Management

Warehouse Development

OSS

Dubai 0% Tax

0% Custom Duty

Repatriation of Capital Zone Services

Convention Centers Hotels

OSR Show Rooms

Investment Management

Community

Products

Infrastructure

Service

17 Source: Chuck Heath, 2011

Companies

Jebel Ali in Numbers 2010

Assets

Economic Contribution

Companies

6,500 Fortune 500 Co.s

117 Countries

120

Million SQM

57 Properties

11,000 USD Billion, Value

4.2

Employees

138,188 USD Billion, 2009Trade

68.6

More than

More than More than

More than

Source: Chuck Heath, 2011

Jebel Ali’s Contribution Significant contribution to UAE and Dubai economy

60.7 AED Billion to Dubai

economy

21.1% Of Dubai GDP

GDP

138 Thousands sustained employment in Dubai

10.1% Of Dubai working

population

Workforce

60.9 AED Billion to UAE

economy

7.9% Of UAE GDP

GDP

139 Thousands sustained employment in UAE

4.4% Of UAE working

population

Workforce

* % in Kgs excluding trans-shipments & empty containers

524 422 55% * 24% * 40% AED Million to

Telecom AED Million to

Water & Electricity Volume to Jebel

Ali Port Volume to Dubai

Intl. Airport UAE FDI

Source: Chuck Heath, 2011

20

• Catalyzing of economic reform, with demonstration effect, rather than serve as an enclave?

• Maximizing linkages between enterprises within and outside the zones?

• Integrating into a local community from a physical planning and social perspective?

• Maximizing transfer of skills, management know-how and technology to ensure the long-term competitiveness?

• Involving the private sector in zone development, promotion and management, through public-private partnerships?

Challenges in Responding to New Trends

Key Lessons Learned • Leadership at the highest political level • Long-term vision and clear objectives • Sound legal, regulatory and institutional framework • Broad but realistic program of improvement of the business environment

• Coherent reform efforts, year after year: “start small and build on demonstrable effects”

• Clear definition of responsibilities among implementing agencies

• Strong public-private partnerships (PPPs) • Follow-up, communication strategy and training