Africa’s freeports should boost trade and foreign exchange earnings – but evidence is thin
The concept of a freeport – an area where normal tax and customs rules don’t apply – has existed for centuries. Over time, different terms have emerged. They include export processing zones, free trade zones, special economic zones and industrial free zones. West Africa has 29 free zones, spanning 11 countries. Examples in west Africa are in Togo’s capital, Lomé, and Liberia’s capital, Monrovia.
The success of freeports in growing local manufacturing and economies is exemplified by countries like Malaysia and Singapore. This success can be replicated in west Africa under the right conditions. The Conversation Africa’s Godfred Akoto Boafo interviewed transport economist Jonas Aryee, who has studied freeports in west Africa.
What is a freeport?
In his book Elements of Port Operations & Management, shipping and export scholar Alan Branch states that a freeport is a free trade zone. Imports can enter with simplified customs documentation without paying tariffs. Imported raw materials or components may be stored or processed duty-free pending re-export, or duty-paid on entry into the importing country or when sold locally.
Note that some of the popular names do not suggest any relation with ports. Indeed, all the definitions state that it is an “area”. Hence, freeports are a trade concept rather than a “port”.
Why are they established?
Freeports are established to accelerate industrialisation and industry-related international trade.
Creating a special regulatory regime in a physically or legally bounded economic space is intended to attract foreign direct investment into a country or encourage local businesses to operate in those designated areas. The purpose is to manufacture goods using imports, add value, and re-export the finished product without paying the full tariff on the original import, whether it be raw material or semi-finished goods.
The potential benefits to the country are numerous. They can increase:
foreign exchange earnings
job opportunities
income generation
foreign direct investment
technology transfer
exports (thus improving the balance of payments).
Research has shown a strong correlation between establishing freeports and strong export performance. According to the World Bank, exports from special economic zones accounted for 17% of Bangladesh exports in 2013, 44% in China (2012), 11% in South Korea (2007), 49% in the Philippines (2011) and 67% in Sri Lanka (2007). This is the result of export oriented policies. Other countries have experienced mixed results. The UK revoked the policy in 2012 but is having a go at it again.
What negative consequences can they have?
Freeports can create several issues. Authorities may be lenient in attracting users, which can lead to illicit financial flows, illicit goods and tax evasion. They can also be used as fronts for illicit activities. These risks have been highlighted in various reports, including the 2020 Mutual Evaluation Report from the Financial Action Task Force, which pointed to Dubai’s freezones, and the European Union’s 2018 study of money laundering and tax evasion risks in freeports.
Firms may misuse the special privileges by conducting transactions of their non-freeport associates through the freeports to evade taxes, as reported in Ghana.
Criminals could exploit the ports for drug trafficking, human trafficking and counterfeit goods.
This has prompted the EU to clamp down on 82 freeports across Europe. The EU found the special duty and tariff status has encouraged organised crime, money laundering and terrorism financing.
Which are the best performers in west Africa?
Ghana and Nigeria are usually notable mentions in the reports from the World Bank and other development agencies. However, it’s important to consider the specific objectives for establishing each freeport when comparing their performance. Countries may set them up to boost employment, attract foreign direct investment or as part of an economy-wide reform experiment, like the gateway project in Ghana. Data on FDI inflows and annual exports is available for countries, but obtaining data specifically for FDI inflows and exports within the free zones themselves is more challenging. Even more challenging is to get data on employment creation, foreign exchange through exports, economic value added and technology transfer.
In 2022, Senegal, Ivory Coast and Ghana were the top recipients of FDI in west Africa. Nigeria, usually a leader, experienced negative figures due to restrictions on repatriating dollars as a government policy. But these trends cannot solely be attributed to free zones. Similar challenges exist when analysing export figures.
Several World Bank reports allude to the data challenges and the poor performance of African freezones compared to Asia, eastern Europe and to a lesser extent Latin America due to implementation challenges.
Which are the worst?
It can be challenging to make assessments about the effectiveness of free trade zones due to the complexity of available data and the various ways we can interpret it.
At the individual company level, we may want to ask questions such as how many companies have invested in the zone, how many are still operating there, and how many have left. Unfortunately emerging research at firm level is country based and does not compare countries.
The reasons for how long a firm stays can vary. They include factors such as the length of tax holidays, employment incentives, preferential corporate tax rates, building allowances, issues related to the repatriation of profits, and assessments of the business environment amongst others. Some companies may also be taking advantage of trade agreements offered by foreign countries, such as the Africa Growth and Opportunity Act of the US or the European Union’s Economic Partnership Agreements, and their decisions may depend on the duration of these partnerships.
Ultimately, the performance of the free trade zone should have an impact on the larger economy at some point during its existence.
