Written evidence submitted by Dr Nichola Harmer, Dr Patrick Holden, Dr Peter Holmes, Guillermo Larbalestier (PIZ0004)

Call for Evidence: The performance of investments zones and freeports in England

Dr Nichola Harmer, Dr Patrick Holden, Dr Peter Holmes, Guillermo Larbalestier.

About the authors: [1]
 

• Dr Nichola Harmer is a Lecturer in Human Geography at the University of Plymouth with a research interest in themes of sovereignty, statehood, non-sovereign territories and sustainability.

• Dr Patrick Holden is an Associate Professor of International Relations and Politics at the University of Plymouth. Their research and policy engagement work on the new Freeports was funded by the Plymouth Marine Institute and the ESRC.

• Peter Holmes is a Fellow of the UK Trade Policy Observatory (UKTPO)[2] and Emeritus Reader in Economics at the University of Sussex Business School. 

• Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex and Fellow of the UKTPO.

1. Summary:

This written evidence is focused on the committee’s questions on Freeports rather than on Investment Zones. These are our key points:

a)      There is a lack of transparency around Freeports, from investment to utilisation of benefits and performance. Not all of the Full Business Cases (FBCs) are in the public domain. Freeport websites vary in detail and forms of information provided. Effective and inclusive communication and consultation with the public is essential for democratic accountability.

b)      Our work suggests that there are limited incentives for investment generated by the free port dimension of the Freeport plan which are available in the customs sites whose areas are restricted. The financial incentives to use Freeports for export promotion or to facilitate imports are very modest. Tax benefits for property development and land use seem to be the core attraction.

c)      “Success” for a Freeport will depend on how it is defined. Several metrics are needed. Rigorous monitoring of the Freeports’ surrounding areas is equally important to consider spill over effects (both positive and negative) of the programme. The performances of Freeports are likely to differ considerably between Freeports overall, and across different objectives.

d)      Without access to the Freeport bids (many not published on the grounds of commercial sensitivity) and/or details on the rationale behind grades given to each assessment criteria, it is difficult to say with certainty if the chosen locations were indeed deserving or opportunities missed.

e)      There is significant variation in the institutional and legal make-up of the Freeports, which may affect how key governance principles are implemented. The most obvious differences are the scale, type of accountable body, and legal form of the Freeport. This makes it harder for national bodies and the public to compare them and hence to understand how they comply with good governance principles.

2. Our recommendations:

a)      The Government should provide official updates on the exact status of Freeports, and how public funds have been allocated.

b)      Government Departments and Freeports should collaborate to advertise and provide guidance on the economic levers central to the programme.

c)      Information should be disseminated about the economic and social development within Freeport areas, including where any changes have been made in planning rules. This is likely to reassure rather than exercise public opinion.

d)      There is not enough evidence on the effectiveness of Freeports to know their value, but it would make sense to retain current rules and incentives in Freeports until time limits expire. Government should use scheduled M&E process[3] to carefully review them in 2026 to assess if the trade element has had any value added.

e)      If the trade impact of Freeports is found to be of no value, customs sites should be subject to normal rules on delaying paying customs such as inward processing or bonded warehousing.

f)        Freeports and Investment zones could be merged, retaining non-trade tax incentives. A new scheme would then be needed that targeted marginalised communities, not linked to port status and which did not depend, as Investment Zones do, on pre-existing R&D capability.

g)      The Government should publish the evaluation reports and, where possible the data used, including detailed local data not currently available.

h)      Purely data driven analysis should be complemented by case studies.

i)        Clearer explanation should be given of the counterfactual used by evaluators.

j)        If the M&E process generates recommendations for policy changes these should be published, and the government response explained.

k)      Central Government must reduce the burden on local authorities arising from repeated rounds of costly bidding which may result in the same bid being submitted each time.

l)        There is a need for increased transparency in selection criteria and processes to ensure that purely political choices cannot be made.

m)    DLUHC should provide and require adherence to rigorous guidelines on communications and transparency, including the availability of information on Freeport websites.

n)      DLUHC should outline clearer guidelines on how local democratic scrutiny should operate in this context.

o)      Local authorities should offer an increased role for Civil Society at higher levels of Freeport governance.

p)      Local authorities and DLUHC should publish all MOUs between the government and local authorities.

3. What is the current status of freeports in England? What has the funding – that has been allocated so far – been spent on? What progress has been made and what needs to happen next?

a)      As of August 2023, all Freeports in England appear to be operational.

b)      All of the Freeports’ Full Business Cases (FBCs) have been at least conditionally approved. Approval of FBCs gives Freeports access to up to £25 million of seed capital funding. It remains unclear, however, the actual amount that has been (or will be) granted. This is a modest sum when compared to Levelling Up-funded projects, though it is expected that much of the investment in Freeports will originate from the private sector.

c)      Based on the Bidding Prospectus and the Government’s FBC Guidance, seed funding is intended to be primarily used on “land assembly, site remediation and small-scale transport infrastructure to connect sites within the Freeport to each other.”

d)      Not at all FBCs are in the public domain. We refer to the Solent and Teesside Freeports’ FBCs as examples, to comment on their broad proposals for the seed funding:

1. Solent: investment for transport and supporting site infrastructure to (re-)develop the tax sites; and a smaller investment to support a junction upgrade and development of the “Solent Maritime Innovation Hub.”
2. Teesside: land remediation and site preparation for “highly contaminated” land at Teesworks West tax site (£21.5 m); and, towards installation of full fibre 5G digital infrastructure to enable Teesside Freeport connectivity (£3.5 m). Note that the latter is technically considered an “exceptional circumstance.”

e)      Other FBCs available contain similar investment plans. The intention should indeed be to prepare the sites and connecting infrastructure for commercial activity. Seed funding may not be spent on customs sites’ security infrastructure.

f)        Thus, subsequent private investment (and most of the economic activity) in the short- and medium-term will likely take place in the Freeports’ tax sites. The first Freeports Annual Report by DLUHC[4] highlights some sizable new investments including a rare earth processing hub in Humber Freeport’s Hull East tax site; and an offshore wind manufacturing facility in the Teesworks tax site. It is unclear the extent to which other businesses already located or relocating to tax sites are utilising the tax benefits. Similarly, there is a lack of information if and how planning rules have been changed to support these investments.

g)      There are indications that business is already taking place and that goods have arrived in customs sites. The location of most of these sites around logistics and distribution centres would suggest that they may just be being used as bonded warehouses for the temporary storage of foreign merchandise. Data on the goods entering customs sites could be included alongside overseas trade statistics to monitor this. More investigation is needed to verify their current state, and there are issues that need to be resolved around the treatment of UK exports that were processed in customs and/or tax sites.

h)      The Annual Report also highlights numerous projects to upskill regional labour pools through the formation of “skills academies.” Most are aimed at boosting “green growth skills” and skills to foster innovation. These academies are a welcomed initiative but there is a lack of information on engagement and recruitment efforts. Their funding appears to derive from a mix of the seed capital fund, retained business rates, and/or other private and public support packages.

i)        Freeports’ success hinges on their ability to attract businesses investment and retain future upskilled workers. Government support can be provided through continued guidance on using the economic levers central to the programme. Likewise, these should be advertised effectively in partnership with other Government Departments to attract and support foreign investment.[5]

j)        The activity in Freeports should be monitored to ensure that funds and customs and tax benefits are being used effectively and efficiently. This includes the construction of customs and tax sites - particularly on greenfield sites that may not be completed in time to use time-limited tax benefits (many of which are only available until 30 September 2026).

4. Recommendations:

a)      The Government should provide official updates on the exact status of Freeports, and how public funds have been allocated.

b)      Government Departments and Freeports should collaborate to advertise and provide guidance on the economic levers central to the programme.

c)      Information should be disseminated about the economic and social development within Freeport areas, including where any changes have been made in planning rules. This is likely to reassure rather than exercise public opinion.

5. Do businesses and/or investors see freeports as an investable proposition today? If not, what needs to change for that to be the case?

a)      In the absence of far more detailed information than we have available this question cannot be answered definitively, but some tentative conclusions are offered based on evidence from external observation.

b)      Our work suggests that there are limited incentives for investment generated by the free port dimension of the Freeport plan which are available in the customs sites whose areas are restricted. Freeports do not avoid import duties but merely delay payment. Special operators and checks are required on goods coming into and out of the Freeport customs sites. Anti-dumping duties still have to be paid on imports, and the UKGT and VAT are payable on any goods going to the rest of the UK.

c)      Exports to third countries may have to pay duty on arrival there. In the case of most of the UK’s continuity FTAs, exports from Freeports that made use of the customs benefits can be excluded from preferential treatment due to “duty drawback” rules.[6] Most of the alleviations of duty payable on entry into the UK are available in inward processing rules and through the use of bonded warehouses.

d)      Rules of origin involving Freeports are a very complex issue. It had been thought that car parts and components imported from the EU and transformed on assembly lines in the UK, but not sufficiently to endow UK origin, might be able to benefit from using factories in the Thames Freeport to avoid loss of EU origin. Motor industry sources have said that this is not the case and there is no benefit to the car industry. A further benefit promised was that firms could import parts and components bearing higher tariffs than the final product into which they might be transformed. This was a major element in the growth of Foreign Trade Zones in the US, but the UKGT introduced lower rates across the board and was specifically designed to eliminate such “tariff inversion.”

e)      The financial incentives to use Freeports for export promotion or to facilitate imports are very modest. Our expectation is that there seems to be very little incentive to invest in trade-related activities whether for processing for the UK or re-exporting. The TCA Art. 153 provides for a review of duty drawback rules two years after the entry into force, and EU rebalancing, anti-dumping and countervailing duties can potentially be imposed.

f)        The tax incentives applying to Freeport tax sites are not insignificant. However, some of these benefits are not much greater than those available more generally, especially in Enterprise Zones and Investment Zones. Note also that Government has maintained generous investment allowances at a national level, especially since 2021, to mitigate the economic impact of the Covid-19 pandemic, perhaps reducing the attractiveness of the tax benefits in Freeports.[7] But there are suggestions that planning rules may be relaxed.

g)      Anecdotal evidence suggests that the new investments attracted went into the tax sites not the customs sites. Customs sites do not seem to be the centrepiece of the operations. Tax benefits for property development and land use seem to be the core attraction.

6. Recommendations:

a)      There is not enough evidence on the effectiveness of Freeports to know their value, but it would make sense to retain current rules and incentives in Freeports until time limits expire. Government should use scheduled M&E process[8] to carefully review them in 2026 to assess if the trade element has had any value added.

b)      If the trade impact of Freeports is found to be of no value, customs sites should be subject to normal rules on delaying paying customs such as inward processing or bonded warehousing.

c)      Freeports and Investment zones could be merged, retaining non-trade tax incentives. A new scheme would then be needed that targeted marginalised communities, not linked to port status and which did not depend, as Investment Zones do, on pre-existing R&D capability.

7. What does success look like for these freeports? How will this be measured and reported on?

a)      A “successful Freeport” would deliver across policy objectives (trade and investment, regeneration and job creation, innovation); and one that ultimately contributed to the Government’s Levelling Up programme and Net Zero strategy.

b)      In the short-term one would expect small infrastructure projects and the (re-)development of tax and customs sites (including those financed using seed funding) to be completed.

c)      To succeed, these projects, together with the policy’s economic levers, would need to attract enough innovative businesses to form new industrial clusters and increase demand for local labour and newly upskilled workers in the region.

d)      The aims of the Freeport programme are that improvements in port infrastructure and connectivity would lead to increases in the volumes of trade flowing through ports located in the Freeport regions.

e)      It is critical that any economic activity attributed to the Freeports is indeed new and not just the result of spatial relocation, i.e., displacement. Some displacement will be inevitable but would not be considered of grave concern if it is not at the expense of other underperforming regions. Possible exceptions to this would be if a Freeport policy is deliberately designed to transfer activity into a particularly deprived area even at an overall cost, or if there is an area whose potential response to the policy is so great that it is worth paying the price of a small negative spillover.

f)        The nature of the commercial activity should ideally be innovative and one that can maximise value added and earnings for workers in the region. This excludes simple distribution and storage activities that are often associated with Freeports. Likewise, illicit activities should be prevented from taking place in Freeports, and national labour and environmental standards maintained.

g)      A technical approach to the ongoing assessment of the policy is detailed in the Freeports Programme Monitoring & Evaluation Strategy.[9] This report documents a transparent and coherent approach to evaluating the programme. It includes key evaluation questions, proposes various quantitative and qualitative impact assessment methods, and approaches to data gathering. 

h)      The report also provides a detailed insight into the expected outcomes and impacts of the policy, which are depicted by a “logic model.” This is a hypothesised causal chain of events starting with inputs and activities that need to be delivered to achieve short-term outputs, that can then lead to medium-term outcomes and impacts, and finally long-term impacts. Thus, “success” in the short- and medium-term can also be interpreted in terms of the outputs and impacts defined here.

i)        There is a list of conditions (or “assumptions”) at every stage of the model that are “required to bring about changes from one step of the model to the next.” They are rated according to “an initial level of confidence” (low/medium/high) at which these are expected to materialise based on a “rapid review” of the academic literature and Freeports’ Business Cases. The creation of new high-skilled jobs (Assumption #20) and minimising displacement (Assumption #29) have been assigned a level of “low confidence.”  If these assumptions are not in fact correct the estimated impact is affected.

j)        The fundamental challenge in defining “success” for a Freeport will depend on how it is measured. Several metrics are needed.

k)      The DLUHC has selected a renowned team of consultants led by Arup to compare the outcome on Freeports with a carefully selected set of “No Freeports” areas such that any differences in outcomes could be due to Freeport status.[10] But, no matter how careful the modelling is it is still possible that the policymakers could have selected non-quantifiable characteristics that made the selected zones more likely to be attractive to certain kinds of investment than other areas. The basic premise behind impact assessments relies on constructing a credible counterfactual to the policy - i.e., identifying what would have happened to the Freeport regions in the absence of the policy. Quantitative results will depend on the choice of the comparison group and may be biased if designated ports and sites had a priori a higher probability of success. Such findings should be complemented with case studies that ask investors how (or if) they would have otherwise invested.

l)        Rigorous monitoring of the Freeports’ surrounding areas is equally important to consider spillover effects (both positive and negative) of the programme.

m)    In case of success, we do not expect all Freeports to deliver equally nor equally across the objectives. This is due to the heterogeneous nature of the Freeports’ Business Cases and target sectors/industries. An account of materialised investments and estimated jobs counts outlined in FBCs could be another metric of success.

8. Recommendations:

a)      The Government should publish the evaluation reports and, where possible the data used, including detailed local data not currently available.

b)      Purely data driven analysis should be complemented by case studies.

c)      Clearer explanation should be given of the counterfactual used by evaluators.

d)      If the M&E process generates recommendations for policy changes these should be published, and the government response explained.

9. Was the process for selecting the location of freeports suitable? Have opportunities been missed?

a)      Given the initial stated policy objectives, the criteria were logical but the choice from the shortlist was not always evident.

b)      One problem was clearly that local authorities are subject to continual bidding rounds and have to submit proposals used previously. The Bidding Prospectus was published in November 2020, and bids were submitted in February 2021. The announcement was made during the Budget in March 2021. This suggests that bids were put together in roughly four months and reviewed in just one month.

c)      It will be difficult to estimate the opportunity cost of preparing and devoting resources to submitting bids for unsuccessful locations. It is worth noting that existing Freeports were allowed to re-use their bids for Investment Zone status.

d)      Without access to the Freeport bids (many not published on the grounds of commercial sensitivity) and/or details on the rationale behind grades given to each assessment criteria, it is difficult to say with certainty if the chosen locations were indeed the most deserving or if opportunities were missed. There may be regions that were perhaps in greater need of the Freeport status and economic levers but lost out because of a poorly crafted bid or other reasons.

e)      Despite the published lists of reasons for selection, there were some reasons to question whether political rather than socio-economic factors prevailed especially in the case of the priority given to Teesside rather than the wider North East bid.

f)        The coastal locations clearly were appropriate for wind turbine construction activity, but it is not obvious that other sites would have been less suitable.

10. Recommendations

a)      Central Government must reduce the burden on local authorities arising from repeated rounds of costly bidding which may result in the same bid being submitted each time.

b)      There is a need for increased transparency in selection criteria and processes to ensure that purely political choices cannot be made.

11. Are the current governance structures for freeports adequate?

a)      This section focuses on how the principles of transparency, accountability and democratic scrutiny are being applied so far.

• Differentiation and complexity

1. There is significant variation in the institutional and legal make-up of the Freeports, which may affect how key governance principles are implemented. The most obvious differences are the scale, type of accountable body, and legal form of the Freeport.
2. The Freeports differ in scale. Accordingly, the number of local authorities involved varies from 3 (Plymouth and South Devon) to 9 in Thames.
3. The type of lead local authority varies. Two are large, combined authorities (Teesside and Liverpool). Two have city councils as their accountable bodies (Plymouth/South Devon and Portsmouth/Solent). One has a county council - Leicestershire (East Midlands Freeport), and three have borough/district councils as the accountable authority.
4. The smaller authorities may find the core reporting and leadership requirements more challenging and it may also complicate democratic scrutiny. It must be stated that in one case (Thames Freeport) the lead local authority (Thurrock) has a very poor financial record.
5. There are also different legal models. Four have chosen to set up the Freeport as a company limited by guarantee; others have different forms of partnership with local authorities. Legal incorporation as a company limited by guarantee may well be the most secure and transparent way of organising the Freeport.
6. Generally, this differentiation makes it harder for national bodies and the public to compare them and hence to understand how they comply with good governance principles.

Relationship with central government

7. Memoranda of Understanding (MOUs) are key documents that formalise the agreed relationship between central government (DLUHC), the relevant local authorities, and the Freeport. This includes the strategy for the use of retained business rates, disbursement of Seed Funding, and expectations regarding broader governance of activities and responsibilities. The retention of business rates is held to have potential for the levelling-up and regeneration activities within the wider Freeport boundaries, and the MOU outline the criteria for project funding from retained business rates.
8. Only the MOUs for the Plymouth and South Devon (PASD) and Solent Freeports were readily publicly available at the time of writing. According to the Government’s Freeport Programme Annual Report (2022) the release of central government funding depends on satisfactory achievement of milestones agreed in the MOU. Analysis of publicly available MOUs shows some variation in areas covered by the MOU, and the significance of these documents for accountability and transparency of Freeport operations. As MOUs are not legally binding this offers some flexibility to both parties but the ultimate power is with the central government.

• The management boards: role of different stakeholders.

1. Generally, there is no role for civil society (apart from universities in the case of two Freeports) on the management board. They may have a voice in other fora but not at the highest level. A greater role might provide some reassurance to those with concerns about Freeports.
2. Local Enterprise Partnerships (LEPs) are usually represented on the board (in some cases the Freeports span different LEP regions) but not universally. Their functions are being devolved to local authorities so it’s not clear if they should retain a prominent role.
3. As directed by the government there is a strong private sector role: landowners, key tenants, major companies involved in logistics or key sectors are well represented. The rationale for private sector involvement is well-known but when individual companies have a formal role at this level, fears of conflict of interest will remain. This can also make transparency more challenging (e.g., some Freeports cannot make public some documents due to commercially sensitive information).

• Democratic scrutiny

1. Fears that Freeports are radically disconnected anti-democratic structures are not grounded in fact. They are embedded in local authorities, but in a complex way that can be hard to understand for non-experts. Also, the Freeports don’t align neatly with local government structures and therefore do not synergise with ongoing efforts to revitalise local government.
2. In the cases where there is one large lead combined authority, democratic scrutiny may be simpler but in most Freeports there are a range of different councils in partnership. Government has outlined clear principles and guidelines on many elements of Freeports, but there is less detail when it comes to democratic scrutiny.

Communications and transparency

3. Effective and inclusive communication and consultation with the public is essential for democratic accountability. Our web-based research showed variation in the extent of easily accessible information provided, and limited reporting of consultation exercises by some Freeports.
4. Some Freeports, such as PASD held stakeholder events at different stages of the development, and Solent held and published consultations on the disbursement of Seed Funding. For others, public reporting of broad consultation at multiple stages is not shared on Freeport websites, and the existence and extent of consultation with communities is not always clear.
5. Freeport websites vary in detail and forms of information provided, possibly reflecting their different stages of development. Some provide limited information on governance structures, board members, or governance documents. Good practice by several Freeports (PASD, Solent, Freeport East, and Humber, in particular) includes an overview of the governance structure and partners; biographies and photographs of board members (including in one case signed code of conduct and conflict of interest statements); the publication of Board Meeting Minutes; the Full Business Case; press releases and tweets; and consultation documents. While all the Freeport websites provide details and maps of relevant sites, further information on: the relationship between the Freeport and the different partners; explanations of public sector involvement; opportunities for public or civil society involvement or influence in the development of the freeport; and details of the powers of the accountable body and the likely process or mechanisms for allocating business rate retention funds as these are developed and become available, might further aid transparency and accountability.
6. Official documents regarding some Freeports, such as minutes of local authority meetings or papers on Freeport issues, can also be found on various local authority websites but given the multiplicity of local authorities and other bodies involved in some Freeports, there are challenges, as raised above, for the public or interested parties in creating a coherent view of the developments and where there may be opportunities for input or influence on the process.

• Workers’ Rights and Environmental Protection

1. The Freeports do not involve any additional risk to workers’ rights as there is no question of exemptions from labour law. The environmental question is more complicated as most Freeports are availing of permitted development rights. How these facilitated development powers are used will have to be evaluated by experts in planning and environmental protection.
2. Setting up the Freeports was a hurried process and this is reflected in the variety of governance models adopted.

12. Recommendations:

a)      DLUHC should provide and require adherence to rigorous guidelines on communications and transparency, including the availability of information on Freeport websites.

b)      DLUHC should outline clearer guidelines on how local democratic scrutiny should operate in this context.

c)      Local authorities should offer an increased role for Civil Society at higher levels of Freeport governance.

d)      Local authorities and DLUHC should publish all MOUs between the government and local authorities.

Dr Nichola Harmer, Dr Patrick Holden, Dr Peter Holmes, Guillermo Larbalestier

September 2023

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