Written submission from Centre for Cities (FRP0014)
UK Freeports – International Trade Select Committee inquiry
1.1 Centre for Cities is an independent, non-partisan think tank. We exist to help the country’s largest cities and towns improve their economic performance and the opportunities for people who live and work in them. Freeports are gaining traction in policy debate as a way to bring jobs and prosperity across the country in a post-Brexit, post-COVID world. We welcome the committee’s inquiry on this topic and would be happy to give oral evidence if it would help inform the committee’s work.
1.2 We have the following expertise to offer the committee on two of the objectives of freeports policy.
1.3 Promoting regeneration and job creation – We have previously assessed the impact of enterprise zones on job creation. Enterprise zones and freeports are similar in that they are essentially tax breaks for specific areas. Enterprise zones offer business rates discounts and capital allowances (and some additional benefits) for businesses that locate within the zones. Freeports essentially class a zone as outside of the UK from a tariff perspective, meaning that if a business imports a good, adds to it (for example, a car manufacturer importing parts and constructing a car), and re-exports it, there will be no import duties to pay.
1.4 Hotbeds for innovation – We have investigated place-based innovation policies and in a recent report, identified the new growth centres across the UK that have the highest potential to become hotbeds for innovation. This builds on our previous work on the national importance and local impacts of the Advanced Manufacturing Park in Sheffield.
1.5 We will now address the committee’s specific questions.
2.1 Any policy attempting to attract higher-paid jobs must address why these jobs have not already located in a locality. It is not clear how freeports – with their main offer being reduced tariffs - will address these issues. Aside from their potential benefits to national trade policy, as a place-based intervention, freeports are argued to have concentrated benefits for the local economies which host them.
2.2 Job creation is often mentioned as the central objective of freeports. Freeports are essentially tax breaks for specific areas, and from a labour market perspective are similar to enterprise zones. Looking at the success of enterprise zones therefore gives useful insight to what should be expected from freeports.
2.3 This insight offers caution on the likely impacts of freeports. According to our findings, enterprise zones introduced under the 2010 coalition government were not able to create the expected number of jobs and there are questions about job quality and additionality:
2.4 Enterprise zones were open to all businesses – from manufacturing to financial services – but the nature of freeports means that they will be attractive only to manufacturing businesses. That will further limit a freeport’s ability to create jobs and there is a real risk as a result that they will be less successful in creating new jobs than enterprise zones were.
Research and development
2.5 Another objective of freeports is that they should “attract new businesses, investors and innovation”. However, this objective must also be considered with caution. The main benefits arising from freeports are mainly reduced tariffs, facilitating the cheaper production of goods. However, businesses or those departments of companies engaging in higher-skilled R&D activities are not primarily attracted by reduced tariffs or ways of cheaper production. Rather, these companies are attracted by a deep labour market with many skilled workers and a base level of innovative activities. That means that, if the place does not offer these benefits, reduced tariffs will not be enough to attract innovative companies. In turn, that makes it very unlikely that every freeport will become an “innovation hotbed”.
2.6 If there is a market failure in an area such that redevelopment of brownfield land needs to take place to solve local inefficiencies, there may be a case for using freeports as a mechanism to enable redevelopment.
2.7 The planning element of the proposals are particularly interesting, so long as they are seen as a testbed for the ongoing conversation around planning reform in England more widely. Moving to a flexible zoning system should result in development which is more closely attuned to the needs of occupants, and result in a quicker and simpler planning process.
2.8 That said, redevelopment itself will not always lead to improvements in an economy, and “build it and they will come” arguments should be avoided. That land once had an economic purpose in the past does not necessarily mean it has one now or in the near future.
2.9 This has particular relevance for those cities and large towns where the policy priority is improving their struggling centres. Many city centres, especially outside the Greater South East, are over-reliant on retail, have high retail vacancies, and have insufficient high-quality city centre office space to attract higher-paid service jobs, even before the COVID-19 pandemic. Redevelopment of land for freeports must take care not to weaken these city centres further by dispersing activity out across the local economy instead of concentrating it in city centres.
3.1 Displacement of jobs from elsewhere is a possible risk. Work on the original wave of enterprise zones showed that the zones created in the 1980s and 1990s encouraged displacement, with businesses moving from elsewhere either locally or nationally to take advantage of the benefits that the zones offer. Although this may appear on the surface to be a success story for the location of the zone, it does not result in new economic output, despite the investment and subsidies which the policy requires.
3.2 Meanwhile, our recent research shows that, of all the jobs in the second generation of enterprise zones in 2017 that were not there in 2012, at least a third moved from elsewhere. So of the jobs created, a large chunk of them were not new jobs, suggesting that enterprise zones may encourage the loss of business stock and jobs in other places in the UK. In addition, if businesses relocate for fiscal reasons only it can be reasonably expected that if the fiscal benefits are subsequently removed, businesses may relocate again away from the zone.
4.1 A key barrier to attracting high-skilled jobs to an area with a struggling economy is the lack of workers with the required skills to fill such jobs. Skills are mentioned in the government consultation on freeports but are not at its core. The lack of clear funding or guidance for skills is a problem, which will limit the permanent improvements freeports will make to local labour markets.
4.2 The introduction of a freeport must be matched with interventions in skills in the local economy. These interventions should encompass several elements such as supporting training, adult education, and other measures to improve the skills base of the local labour market. Crucially though, this is an issue that does not just affect the freeport area, it affects the whole of the local economy.
5.1 The proposed criteria for selecting sites are in line with the objectives of freeports as set out – establishing national hubs for global trade and investment, promoting regeneration and job creation and to create hotbeds for innovation.
5.2 We would warn thought that it is unrealistic to expect that freeports are able to address these objectives all together. For instance, not all freeports will have the same potential to develop into innovative hotbeds because the primary benefits of freeports – reduced tariffs and customs are rarely the right bait to attract innovative companies. It is mainly a highly-skilled workforce and the presence of other innovative companies which attract these types of firms. This means that if the selected places do not have a critical mass of innovative stakeholders in place already before the freeport has been set up, it is highly unlikely that freeports will attract innovative players or highly skilled workers.
5.3 One idea is to agree on different types of freeports with different primary objectives and associated packages of measures. One could be a more advanced type of freeport that can realistically become an innovative hotbed because they already have a critical mass of stakeholders in place. These will however be limited by the number of places in the UK that are strong in manufacturing (and could therefore benefit from tariff reductions) and have in addition an elevated innovative capacity. According to our data, Derby and Coventry are the only cities in the UK that have the potential to actually transform into innovative hotbeds linked to freeports. The risk here though is for potential deadweight costs if innovative firms were likely to locate here irrespective of the policy being in place.
5.4 For other places that have higher levels of deprivation and unemployment, the primary objective should be to turn these places into more attractive locations for businesses and help people to find work. To do this, job creation within these freeports would need to either have an apprenticeships programme in place or be linked to further education and skills programmes to give people the skills they need and provide a job at the end of the training programme.
5.5 As a result, we would suggest that the selection criteria for these two different types of freeports should vary, giving a stronger emphasis on sustainable job creation for the regular freeports and criteria linked to innovation for “innovation freeports.”
6.1 Analysis of enterprise zones created in the 1980s and 90s showed displacement was a problem, with businesses moving from elsewhere either locally or nationally to take advantage of the benefits that the zones offer. Around a third of jobs were lost elsewhere in the UK and our work on the more recent zones suggests this has happened with these zones too.
6.2 Mitigation may take place at different levels. First, having skills schemes in place targeted at people who are economically inactive or unemployed, with a job at the end of the scheme, could help bring people back into the world of work. This could be complemented with incentives for companies creating jobs for formerly unemployed or economically inactive people.
6.3 For higher skilled “innovation freeports” which have the potential to transform into innovation hotbeds, the attraction of high-skilled migrants to these areas could be an option. This could be done by granting freeport visas to new graduates from other countries that would tie them to working at the freeport for a set number of years, for example. This would help build up the profile and capacity of the freeport in the absence of a local talent pool.