Freeports and Investment Zones – an economic boost or race to the bottom?

A key plank of the Government’s bid to drive economic growth has been its commitment to Freeports and Investment Zones – but are they as beneficial as they would appear?

The Government pledges they will remove onerous regulations and make it easier for businesses to invest and develop trading links.

Regulations are similar for both initiatives and range from big tax cuts, including proposals for the abolition of stamp duty, employment taxes being slashed, planning rules swept aside and companies able to completely write off investments in plant and machinery.

Planning changes under consideration include removing restrictions on height limits and potentially ditching requirements for affordable housing alongside developments, as well as other regulations such as environmental rules.

Former Chancellor, Kwasi Kwarteng, stated in a fiscal statement: “On purchases of land and buildings for commercial or new residential development, there will be no stamp duty to pay whatsoever.

“On newly-occupied business premises, there will be no business rates to pay whatsoever. And if a business hires a new employee in the tax site, then on the first £50,000 they earn, the employer will pay no National Insurance whatsoever.”

There are currently eight English Freeports, including East Midlands Airport, Humber Region and Liverpool City Region.

Liverpool City Region Mayor, Steve Rotheram, welcomed Freeport status, claiming: “Our Freeport has the potential to add an additional £850m to the local economy.”

John Lucy, director of Liverpool Freeport, said the number of new jobs likely to be created by Liverpool Freeport is 10,000, while Dafydd Williams, head of policy, communications and economic development (Humber) at Associated British Ports, estimates that 7,000 jobs could be created at Humber Freeport.

Former Chancellor, Rishi Sunak, unveiled plans to create Investment Zones in his March Spring Statement and there are currently 38 areas in England that could set up an Investment Zone, including Liverpool and Greater Manchester, Lancashire, and West Midlands.

They promise similar freedoms from red tape as Freeports.

But there are growing concerns over what these relaxations could mean.

One unlikely objection is from wildlife charity, the RSPB, which fears easing planning regulations will lead to an “attack on nature” and claims housing and commercial developments could be incentivised to damage nature with little or no restriction

Another area of concern is the impact on workers’ rights and even the opportunity to encourage lawlessness, such as money laundering.

These fears are voiced by tax campaigner Richard Murphy, Professor of Accounting Practice at the University of Sheffield Management School.

He said areas, like Freeports, are, in effect, tariff-free zones: “The effect of this exemption from tariffs is to provide a tax subsidy to products sold from the Freeport if they are exported. That means that this benefit goes to other countries, and not into the UK market.

“Very often, other tax laws are also waived. The most common relate to employment taxes. So, for example, current UK Freeports waive the employer’s National Insurance charge in respect of people employed in Freeports, meaning that the cost of employing people is reduced.

“Again, though, this does not reduce tax for the employee. All the benefit of this goes to the employer. It is they who get the subsidy. And the country, as a whole does, of course, lose out on tax revenue as a result.

“There are also local taxes that are usually waived, eg, business rates. That means that unless the council in which the Freeport is located is compensated for this loss of revenue – which is another subsidy to business – then the local community loses out or has to pay more tax.

“These are not the only taxes that can be waived. For example, corporation tax on profits arising in Freeports can be reduced – although how to calculate just what those profits are is open to widespread abuse. This, once more, is a subsidy to business.

“And there can also be exemptions from other taxes, eg, to capital gains tax on assets held in Freeports. This is currently the appeal of many EU-based Freeports which are used to store works of art tax-free because of this exemption.”

He also raised another area of concern: “In addition to the tax exemptions, reduced health and safety standards are often permitted in Freeports. These put workers at risk. Reduced employee protections are also common, again putting workers at risk.

“Environmental standards can also be waived. So, too, might other standards, eg, on money laundering and other measures intended to prevent crime.

“The whole essence of a Freeport is, then, to provide a low regulation environment, not just because of relaxed law, but also because of relaxed enforcement.

“And this is not only within the Freeport, but also on its border. Bizarrely, what Freeports create are many borders within a country as goods can move in and out of different Freeports, each with their own separate regulations and maybe tax rules.

“The very borders right wing politicians say they hate are at the heart of Freeports. There is good reason for this paradox. The more rules there are, and the more borders there are, the more a business can abuse the rules of Freeports to negotiate their own advantages.”

He added: “Unsurprisingly the Organisation for Economic Co-operation and Development, of which the UK is a member, has found that there is a strong link between the lax regulation in Freeports and criminal activity.

“This criminality is not just related to normal trades. There have been many reported concerns about the use of Freeports to trade artworks that are owned by offshore companies as a way of criminal money laundering.

“So, Freeports are linked to lax, and potentially unenforceable regulation whose operation is very often outsourced to private Freeport operators. This is bad news for law enforcement as they create an environment where the law is often not known.

“Worse than that, Freeports create a ‘race to the bottom’ in the regulations that they offer to out-compete each other to get businesses to locate in their Freeport rather than another one.”

Prof Murphy accepts he could be accused of being too negative, but asks: “Do Freeports actually encourage growth as their proponents claim? There is no evidence for it. At best there is evidence that they might encourage jobs to be moved into Freeports from areas outside them. But there is no evidence that Freeports actually create new jobs or growth.”

He said this is why a previous experiment with Freeports was scrapped in 2012: “They simply did not work for the economy as a whole.”

Prof Murphy concludes: “Freeports undermine the integrity of the law and regulation in the UK, reduce taxes for employers, but not employees, and usually end up with workers more vulnerable than they are in the rest of the country.”