Written submission from UK Free Trade Zone Association (FRP0017)

 

Freeports Consultation - International Trade Committee

Introduction

  1. By reference to Government’s Consultation Paper dated February 2020[1] (the “Consultation”), The UK Free Trade Zone Association (“UKFTZA”) considers that the basic Freeport model could be improved considerably by reference to the following.

More than just bonded warehouses

  1. The Consultation is framed very much in the context of bonded warehouses at either coastal or inland Freeports with little or no manufacturing, services or value-add except just storage. Unfortunately, bonded warehouses, certainly the more modern ones, are not the greatest employers, if the aim of Freeports is to create jobs and enterprise to “reboot” the UK economy post Covid19. Most modern warehouses are “lights off”, i.e. reliant on automated storage systems employing few people except some higher value maintenance engineers to service them.
  2. To be more effective, Freeports need to include added value manufacturing and services, as more fully described below.
  3. Moreover, Freeports are more than being about just tax and tariffs, not least because according to Government’s own statistics (e.g. Figure 1 on page 5 of “Public Consultation on the Global UK Tariff” [2] ) most of the tariffs listed there according to Government’s own sources are below 5% with the exception of Food, beverages, textiles and tobacco. And these are typically less than the exchange rate fluctuations which businesses in the UK and elsewhere in the World face daily.

Whole of the UK should be able to join

  1. We note that there are some 650 MPs, but assuming Freeports are limited to only 10 “clusters” suggested in the Consultation, with, say, 3-4 MPs each, that only amounts to 30-40 MPs or 4.6%-6.2% when Government needs over 50% of MPs to pass the primary legislation to implement Freeports.
  2. Accordingly, to allow the maximum numbers of the UK electorate to benefit from the Freeport initiative, the UKFTZA would argue strongly for SMEs, accounting for 99% by number and c. 3/5ths by people employed[3] of the UK economy, to be joined to Freeports via Authorised Economic Operator (“AEO”)[4] and related ISO [5] models, as below, as a means to deliver this.
  3. Moreover, whilst it is still early days, it is evident that job losses post Covid19 will not be restricted to just port cities and coastal towns (one of the principal considerations in framing Freeport policy) and that significant unemployment will likely occur inland in such places as Crawley, Burnley, Slough, Sunderland and Birmingham[6]. All the more reason for Freeports to include inland areas and join as many SMEs as possible via AEO and other such mechanisms below.
  4. We understand that Government is very keen to avoid displacement. However, if the benefits of Freeports are to be available to the whole of the UK, this will not be an issue if Freeports are not restricted to only 10 “clusters” and any enterprise anywhere in the UK can be joined by the AEO mechanisms below.
  5. The UK is largely a service-orientated economy, so whilst it is important to kick-start more manufacturing in the UK, services are equally important and on which the Consultation was largely silent. Both need to be highlighted in the Freeport policy in UKFTZA’s view.

Regulation

  1. The Consultation is largely silent on who the Regulator for Freeports might be, although by reference to the proposed changes to planning law mentioned below, the inference is that the regulator would be Regional Mayors, LEPs, local councils and/or combinations thereof ?
  2. The other major problem created by reference to 10 geographically defined “clusters” is that it creates potential monopolies or quasi-monopolies, which could be challenged by judicial review when Port A wins and Port B loses. Moreover, when one Freeport operator fails in a similar way to a rail franchise, how do you sack the operator for non-performance (however judged) ? Particularly, if the Freeport is structured as a joint Public/Private venture, which again could lead to complications. Using the extensive experience gained at the time of privatisation (e.g. utility company regulation), Government needs to consider the detail on how it can create genuine enterprise and capture efficiency gains in Freeports but not allow monopolies or quasi-monopolies to be created that prejudice the interests of the consumer/taxpayer.
  3. Accordingly, the solution would be the creation of a regulatory body, call it “Offport”, where enterprises of any type can join a Freeport (preferably virtual and not linked to any particular geographical area only) and be regulated much as financial services companies are regulated by the FCA [7]and restaurants and other establishments selling food are regulated by statute by the FSA[8]. The interesting point about the latter is that the regulatory cost for the latter is minimised, but still effective. Thereby allowing the maximum number of SMEs and other enterprises to join, as appropriate, so long as they are “fit and proper”, i.e. have proper corporate governance, accounting records, staff training and so on, needed to discharge their duties to the specified standards.
  4. This would also give a lot more flexibility as Freeports evolve over time in line with changes in the economy and other factors. Offport would need to work with other agencies, inter alia, Border Force, Customs and Competition Commission, but broadly speaking the UKFTZA sees no need to reinvent the wheel. The only difference being that Offport will likely be talking to more and varied organisations and not just the coastal ports or bonded warehouse constituents as currently envisaged or inferred by the Consultation.
  5. Finally, if Freeport participants are regulated directly by Offport, Government (local, regional or central) will have no responsibility for their operations, nor for legal risks, which would be another advantage.

 

Authorised Economic Operator (AEO”) and related mechanisms

  1. AEO and related ISO [9] mechanisms provide a potential means to join the vast bulk of the UK economy to Freeports and not just the coastal and inland ports being contemplated under the 10 Clusters in the Consultation. It also has a number of other advantages below:

Planning

  1. Government is looking at changing planning law anyway[13], but in the Consultation, marginal changes involving Development Orders are not enough to deal with the needs for infrastructure and place-making of the type that delivered Wembley, Dome and North West Cambridge developments, for example. Wholesale review of planning law is required in the UKFTZA’s view.
  2. So, planning reform to get the UK economy moving post Covid19 does not need to be restricted to just Freeports, notwithstanding that the latter would benefit from such planning reform.
  3. Generally, planning tends to be “adversarial” such that when “both sides get lawyered up”, the cost to the developer as well as Government can high and the result is that projects tend to be materially time-delayed or otherwise fail.
  4. Moreover, the system favours people objecting such that the local interest always wins out against the national interest, Heathrow Third Runway being just one example. Also, aesthetics appear to be more important than land use in many instances.
  5. Notwithstanding, Freeports could be a good pilot test-bed to see how place-making and joined-up planning could be made to work to deliver larger projects before rolling those policies out to the rest of the UK. In particular, as it relates to road (e.g. Lower Thames Crossing), rail (rail hubs at coastal and inland Freeports), National Grid (typically ports are big users of power) and other key infrastructure, such as the UK broadband infrastructure, which just about held up when large sections of the UK were working, and continue to work, from home.

Technology

  1. The Consultation expressed a wish to see more achieved on the technology front. However, by limiting Freeports to set geographical locations (Coastal or inland), it makes it remarkably difficult to join universities (Oxford, Cambridge, other Russell Group) and other technological centres such as HereEast [14] or the Dyson Institute[15], none of which fall within these locations and not inside the perimeter fence, as currently promulgated. 
  2. Joining SMEs via AEO mechanisms could also be considerably advanced for example by promoting such industries as distributed ledger, AI and other such technologies in the Freeports. Virtual Freeports and direct regulation (as below) could significantly add in this regard.
  3. Technology can also add a lot of potential employment, for example, Modern Methods of Construction where there are some 60 companies active in the UK. There is some 4 million housing units shortage in the UK currently, so with the average production of such factories of about 400-500 units a year, it could yield some additional 30,000 jobs if new MMC factories can be added to Freeports with added value manufacturing. Moreover, MMC plays very well to the sustainable development, low waste, energy efficiency and low carbon agendas. 

 

State subsidy rules

  1. Given the current state of the Brexit negotiations, we do not wish to speculate on whether a Free Trade Agreement(s) can be concluded or not.
  2. Notwithstanding, the UKFTZA takes the view that the UK has to abide by state subsidy rules, be they WTO or EU state subsidy rules, and accordingly Freeports need to be compliant with these international treaty obligations.
  3. Accordingly, the UKFTZA takes the view that changes to planning policy is likely to be much more beneficial than concentrating only on tax and tariffs via the bonded warehouse model put forward in the Consultation, for example.
  4. In fact, Freeports need to stand on their own feet without reference to state subsidy or the UK taxpayer to support them. The ability to finance them by reference to foreign direct investment is probably the most objective measure of their attractiveness and success.

 

Regional Regeneration

  1. Whilst regional regeneration, as expressed in the Consultation, is important, many other parts of the UK are also likely to suffer directly as a consequence of Covid19 with unemployment likely to rise significantly. Examples being inland places such as Crawley, Burnley, Slough, Sunderland and Birmingham, as above. All the more reason for Freeports to include inland areas and join as many SMEs as possible via AEO, distributed ledger and other such mechanisms.
  2. Another deficiency of the physical “cluster” model is that Government could be seen to favour one region over another. Moreover, physical clusters mean that local businesses forming part of that cluster typically have to have a common purpose, which might not be the case in many instances. Made worse if the local government entity has to take responsibility for the relevant enterprises as inferred in the Consultation.

Interface with other legislation and policy

  1. One area on which the Consultation was largely silent was how Freeports would interface with other parts of UK legislation. Generally, the UKFTZA sees no reason why Freeports should be any different to the rest of the UK in respect of, inter alia, environmental, carbon, equality policy issues and so on. Other issues like energy policy (National Grid), on-shoring (relocating industries like chemicals and other jobs lost to overseas markets), nationally strategically important industries, supply chains, were largely not mentioned (with the exception of some comment on transport and technology), but need to be considered in detail also in UKFTZA’s view.
  2. So, by reference to “Forging our Future Industrial Strategy The Story So Far” [16]and “Local Industrial Strategies Policy Prospectus October 2018”, [17] the National and Local policy matters which Freeports could help address comprise, inter alia, creative industries, aging society, international impact, robotics, life sciences, apprenticeships, automotive, AI, nuclear, construction and low carbon emissions.

Security and tax evasion

  1. Concerns have been raised that Freeports will be a charter for tax dodgers and money launderers, which could not be further from the truth with the right AEO, ISO and other corporate governance systems in place. Proper regulation is the key, which is why we would strongly recommend the creation of Offport above working alongside Border Force and Revenue and Customs to enforce it. At the heart of the issue is “who does Government trust” ? So, by reference to the FCA and also FSA above, all relevant firms are supervised appropriately and those that do not meet the required standard are fined, disqualified or other sanctions applied, as appropriate.  So, security should be intelligence and governance-led and there is no need for Freeports to be “behind the perimeter fence”, a severe limitation on the opportunity.

Supply chains and national strategic interests

  1. Covid19 really exposed failures both in UK as well as global supply chains. Accordingly, Freeports could be an excellent vehicle to deliver on the following where the Consultation was largely silent:

(i)                  On-shoring, bringing key strategic industries and jobs lost to overseas markets back to the UK via Freeports

(ii)                 But this requires Government to re-evaluate its national industrial strategy, not to “pick winners”, per se, but to deploy other policies to promote UK manufacturing, services and employment

(iii)               Identify key industries in the national interest such that the UK is not caught out again to the greatest extent possible.

 

Foreign Direct investment and training

  1. Consistent with keeping the UK’s international treaty obligations on state subsidy rules, there is no reason why Freeports should be state-subsidised at all by the UK taxpayer. Freeport policy in UKFTZA’s view should encourage foreign direct investment to fund Freeports in conjunction with the private sector. Indeed, overseas investment forms a reliable and objective test (e.g. the relevant project makes financial sense, and where the overseas investor is also making “soft”, but important assessments, inter alia, political stability, rule of law, quality of workforce as key metrics in its decision to invest or not). Freeports provide an elegant mechanism to review all such policies if they are to be financed without reference to the UK taxpayer.
  2. Moreover, it is the reason why the Freeport agenda should also actively promote training to deliver the workforce to a global standard to attract FDI investors.

Promoting Freeports to a wider audience

  1. Whilst there has been some coverage of Freeports in the press, the UKFTZA considers that general awareness of the Freeport opportunity is low, in particular, amongst SMEs, who, as explained above, have a very significant contribution to make. To enable Freeports to be a success, Government needs to communicate the opportunity with a comprehensive promotion campaign like “Exporting is Great”[18]. This could be delivered, for example, via the 56 or so British Chambers of Commerce [19] and smaller business federations[20] amongst other trade bodies.
  2. If one regards Freeports as nothing more than a “policy toolbox” to do as much or as little as Government wants, then, in the UKFTZA’s view, it needs to be opened out to the widest audience possible, who will have ideas on enterprise and job creation that will not have been contemplated in the Consultation, particularly in the field of technology and innovation.

Further information

  1. Of necessity, the above is only a summary of some major issues and points that could be considered to improve the Freeports model. Much will depend on the detail of industries, locations and local needs one part of the UK to another in order to home in on those policies likely to deliver most value overall. This detail will need to be worked through far more fully in UKFTZA’s view and the UKFTZA would be willing to assist field potential situations and experts to help work these up into deliverable projects.

 

 

© UK Free Trade Zone Association Limited               26th August 2020

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[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878352/Freeports_Consultation_Extension.pdf

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/865087/Public_Consultation_on_the_UK_Global_Tariff_-_updated_accessible.pdf

[3] https://www.fsb.org.uk/uk-small-business-statistics.html

[4] https://www.gov.uk/guidance/authorised-economic-operator-certification

[5] https://www.iso.org/home.html

[6] https://www.theguardian.com/politics/2020/jun/11/more-than-a-third-of-employees-furloughed-in-some-uk-towns

[7] https://www.fca.org.uk/

[8] https://www.food.gov.uk/

[9] https://www.iso.org/home.html

[10] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-distributed-ledger-technology.pdf

[11] https://data.gov.uk/dataset/66a80f1f-01f7-4c83-9449-a7c6592b7278/customs-handling-of-import-and-export-freight-chief-declarations-database

[12] https://www.gov.uk/government/collections/customs-handling-of-import-and-export-freight-chief-replacement-programme

[13] https://www.gov.uk/government/consultations/changes-to-the-current-planning-system

[14] https://hereeast.com/

[15] https://www.dysoninstitute.com/

[16] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/762214/181205_BEIS_OYO_Brochure_web.pdf

[17] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/744544/local-industrial-strategies-policy-prospectus.pdf

[18] https://www.gov.uk/government/news/exporting-is-great-major-opportunities-programme-launches

[19] https://www.britishchambers.org.uk/

[20] https://www.fsb.org.uk/