UK freeports Contents

4Incentives and risks

Incentives

Customs

45.The Government has proposed a package of incentives to accompany freeports in the UK. In evidence, we heard that this support would be critical to distinguish the freeports policy from traditional freeports.119 A key component of traditional freeports is customs benefits. The Government’s offer provides five specific customs benefits to support businesses trading at freeports. These include:

46.Dr Anton Moiseienko, Research Fellow at the Royal United Services Institute’s Centre for Financial Crime and Security Studies, told us the proposed customs measures were broadly in line with the offering in freeports around the world. Some witnesses indicated that the customs benefits alone would not be sufficient for the success of freeports in the UK context.121 Chris Starkie, Chief Executive Officer of the New Anglia Local Enterprise Partnership, expressed the view that the customs measures “would not be enough of an incentive” and a more rounded packaged would be required.122 In evidence before the Treasury Committee for their inquiry into UK customs policy, Tim Reardon, Head of EU Exit at the Port of Dover, said of freeports:

If the scheme were to be confined purely to temporary relief from customs tariffs, the value is likely to be substantially less than if it were to take a more holistic approach to making life easier to generate new activity.123

Nonetheless, business representatives were confident that there would be opportunities from the customs procedures but that these would vary by sector and by the products being brought in freeport sites for production purposes.124

47.Some evidence suggested that established customs procedures such as inward processing relief and bonded warehouses offered many of the same benefits as those in the freeports package.125 Alex Stojanovic, of the Institute for Government, said there had been suggestions that these processes were still quite burdensome and could be simplified further as part of a freeport.126 Port operators welcomed the opportunity to simplify and streamline customs procedures and we heard that there was an opportunity to embrace technology to ensure effective customs checks.127

48.The impact of the UK’s global tariff regime of the freeports policy was also raised in evidence. Dr Peter Holmes, of the UKTPO, outlined that “The value of the concessions on customs duties is clearly related to the height of the duties that would otherwise be paid.”128 He noted that the Government’s global tariff, a zero-tariff agreement with the EU, and the rollover of continuity trade agreements, would mean zero tariffs on more than half the UK’s imports. Therefore, he maintained “the value of the tariff concession will be very low, and would do little to encourage economic activity within the Freeport”.129 Alex Stojanovic referenced the relative significance of the tariffs on intermediate goods and cited the example of Foreign Trade Zones in the US, where tariffs on some intermediate goods are high, benefitting industries such as car manufacturing.130 Research based on the UK Global Tariff by the UKTPO found that the weighted average tariff on intermediate goods was 1.6%, compared with 8.8% for finished goods, and just under 60% of intermediate goods were duty-free in the UK context. Where the UKTPO identified potential savings from tariff inversion, it said “the benefits are small and would not have any material impact on the UK economy”.131

49.When questioned about the customs aspects of the freeports policy, the Chief Secretary to the Treasury referenced the pre-2012 policy and said the difference was “in the breadth of the package as a whole”.132 He elaborated that:

It is not a question of picking out one bit of customs policy and comparing that with what there was before, in 2012, or with what there is outside of the wider freeports policy. What you have is the package on the customs side, the tax side and the planning side, and some seed funding.133

Taxation

50.The Government’s proposals included a range of tax reliefs to “incentivise business investment in capital assets and employment within Freeports to increase productive activity and achieve the Freeport policy objectives”.134 The reliefs proposed included:

While most tax policy is reserved, business rates are devolved in each nation and Stamp Duty Land Tax is devolved in Scotland and Wales.136 The bidding prospectus confirmed that the tax offer would only be available within a tax site. It indicated that bids should aim for a single site but that up to three sites would be considered where there was an economic case to do so. The Government’s criteria included that the sites should be located in areas with below national average GDP per head and above average national unemployment rates.137

51.The Government said its tax offer intended to build on the approach to enterprise zones in England and Wales.138 The Chief Secretary to the Treasury told us that the tax offer went “to the heart of how we see the freeport sites operating as drivers of regeneration and innovation”.139 He explained the Government’s approach:

[ … ] often sites around ports that may well become, or are likely to become, freeports are areas that need levelling up. What you want is businesses investing in those areas, in things like site acquisition. When they have the land, they need to invest in the buildings and the plant and machinery, and they also need to recruit, and that is the tax package that has been put together.140

The Chief Secretary to the Treasury did not say what the change in revenue to the Exchequer would be from these measures but responded that “Ultimately, and as always within the Treasury, the real prize on offer is increased productivity.”141

52.The Aberdeen Harbour Board felt that tax incentives would be “vital” in attracting investment to support the development of infrastructure for new business opportunities. Further, it said that Enhanced Capital Allowances would also attract new businesses and support the development of green energy and alternative fuel technologies.142 UKMPG referenced the need to retain flexibility in the financial offer to recognise different local needs and cost bases of different industries. Further, it said different levers would have differing effects, using the example of business rate relief which “might have a low incentive effect for some potential occupiers”.143 The devolved governments suggested that the tax offer in their jurisdictions could differ from the UK Government’s offer where taxes were devolved.144 In addition, Aidan McMahon, Deputy Director at the Department of Finance in the Northern Ireland Executive, indicated that more information about why particular tax levers were selected and others not included, such as corporation tax, would be welcome.145 Roger Pollen, Head of External Affairs at the Federation of Small Businesses Northern Ireland, told us that corporation tax was of particular significance in Northern Ireland due to the disparity with the Republic of Ireland.146 Some evidence also raised concerns about the risk of tax evasion at freeport sites in the context of the wider risk from illicit activity (see below).147

Government funding

53.In its bidding prospectus, the Government announced that successful bids in England would have access to a share of £175 million of seed capital funding. The Spending Review 2020 stated that this would be partly funded from the Towns Fund. The Chief Secretary to the Treasury told us this would then be subject to Barnett consequentials to determine the level of funding for the policy in the devolved nations (see Chapter 5).148 Minister Hall outlined the Government’s expectation that financing would be focused primarily on land assembly, site remediation and small-scale transport infrastructure. The bidding prospectus noted that seed capital could not be used for security infrastructure at customs sites and that proposals to spend it on skills, digital or other infrastructure would only be considered in exceptional circumstances.149 Subject to the acceptance of a business case, bids were expected to receive similar shares of the fund with larger requests considered in exceptional circumstances.

54.The bidding prospectus indicated that other funding streams would also be accessible to organisations within a freeport including innovation funding and funding from existing or future government funding rounds.150 The Government said it would also make some funding available initially to assist with local governance set-up costs and contract some support centrally to aid freeport operators in developing governance structures.151 In the Spending Review, it was indicated that this would be resource funding valued at up to £10 million.152

55.UKMPG commented that “Developing capable global gateways is not an overnight task and is one that requires hundreds of millions, if not billions, of pounds of investment.”153 It contended that public funds should act as “incremental incentives” and build on locations where investment had already been made. We also heard of the importance of sustained investment in infrastructure. Alex Stojanovic cited the example of the Isle of Dogs and told us that one of the reasons it was successful was due to investment in transport infrastructure, skills, housing and commercial property for over a decade.154 Transport infrastructure and connectivity in particular were raised. Charles Walker, of ChamberlainWalker Economics, told us that freeports generated economic growth through enhanced international connectivity which made trade more seamless but that improvements would be required to both domestic and international connectivity.155 Councillor Kevin Bentley, of the Local Government Association, said consideration would need to be given to any necessary infrastructure enhancements, including the impacts on services for train passengers.156

56.The Chief Secretary to the Treasury indicated that the Government had adopted an approach which sought to incentivise businesses to invest. He told us that the figure for seed capital funding was based on “what we think would be a reasonable sum for some of the things that are needed for freeports from an infrastructure and works perspective”.157 He later added:

The point is that this is not about making infrastructure works. It is about innovation and businesses themselves being incentivised to invest, which business, not Government, should do.158

In terms of ongoing Government support, the Chief Secretary to the Treasury said the tax lever was demand-led and that the wider nature of the Government’s support would be important in maximising the opportunity. He recognised that the offer was different to other international freeports and said that DIT would work with successful bidders to ensure the right package of support was available.159

Other incentives

57.We also heard evidence about some of the non-fiscal elements of the freeports package. Port representatives and operators highlighted planning in particular as an element of the freeports package of significant benefit to them.160 The Government has proposed to extend permitted development rights for seaports to align with airports and to adopt simpler, area-based planning through Local Development Orders. It said these changes would allow for a wider range of development to take place and would provide greater certainty for defined types of development.161 The bidding prospectus also set out how the Government planned to incentivise innovation. This included funding for the establishment of a Freeport Regulation Engagement Network to provide an opportunity for direct engagement between freeport operators and relevant regulators.162 The Chief Secretary to the Treasury indicated that the innovation aspects would include working with regulators to get products to market more quickly and that the regulatory response would depend on the sectors located within freeports.163

Legislation

58.The Chief Secretary to the Treasury told us that there was unlikely to be a Freeports Bill as legislation was already in place in a number of areas. He said the tax changes could be made through the Finance Bill and that the Government already had powers under the Customs and Excise Management Act 1979 to designate areas for customs purposes. Minister Hall said the Government had committed to changing regulations related to permitted development rights in this calendar year (2021). Further, he said he expected changes to business rates due to the policy to be implemented by regulation in early 2022.164

59.The package of incentives associated with the UK freeports policy distinguishes it from the traditional freeports model and we welcome the range of measures the Government has committed to. Freeports focused solely on tariff benefits would be unlikely to be successful in the UK.

60.Investment in freeports will also be critical to their success, particularly in the areas of infrastructure and connectivity. Increasing connectivity for both the freeport, and the wider area within which it is located, should be a key consideration in the allocation of seed capital funding.

Risks to freeports

Economic displacement

61.UK freeports will be competing with ports and freeports internationally alongside other UK ports and industrial bases.165 This creates a risk of displacement, when economic activity, including investment and job creation, moves from one location to another due to the availability of fiscal and other incentives. The risk of displacement has been raised frequently in reference to the freeports policy and in evidence to our inquiry. A recent report by UK in a Changing Europe concluded that:

The main impact of freeports–and any associated reductions in regulation–is therefore likely to be to relocate rather than create economic activity and jobs. That said, freeports in the UK could be a part of a broader industrial policy drawing on recent experience with enterprise zones.166

Dr Peter Holmes, of the UKTPO, said there was “undoubtedly a strong case for supporting areas of the UK that are doing less well than average” but that “Once one restricts benefits geographically, one opens up the possibility that you relocate activity from outside to inside the favoured area.”167 Andrew Carter, of Centre for Cities, outlined that it was not possible to eradicate displacement and that “there will have to be an element of displacement in the very functioning and style design of the scheme”.168

62.Chris Walker, of ChamberlainWalker Economics, told us that it was important to distinguish between good and bad displacement. He cited potential for clustering and agglomeration benefits where disparate economic activity was brought together within a freeport site. He also referenced levelling up, where economic activity is displaced from rich areas to poor areas, as another example of good displacement from the national perspective.169 Alex Stojanovic highlighted that some bad displacement had the potential to create a loss by replacing economic activity and applying lower taxes. He also noted that it was possible to lower productivity by moving activity from a high-productivity place to a lower-productive place.170 Evidence also referenced the longer-term economic disadvantage displacement could create. Centre for Cities said that displacement of jobs from elsewhere was a possible risk and that:

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.171

Dr Peter Holmes also noted that:

Even if firms do not relocate from elsewhere with the introduction of a Freeport, as the economy evolves, if an Enterprise Zone is effective, firms outside it will be less competitive and in an economy they may decline in relative size.172

63.Some port representatives felt the risk from displacement and economic disadvantage to areas not selected as freeports was due to the limit on the total number of sites to be chosen. The British Ports Association suggested that this could be mitigated by not restricting the total number of locations.173 The Cromarty Firth Freeport Steering Group also proposed expanding the number of locations or addressing the issue by only awarding freeport status to ports in areas of deprivation which could demonstrate that they were attracting new business.174 We also heard evidence from the Centre for Cities about its research into displacement linked to the enterprise zones policy.175 Chris Starkie told us that Local Enterprise Partnerships were surprised by the findings of the research and that in their experience, the benefits of enterprise zones were relatively modest. He said that where businesses had moved, it was for growth reasons such as requiring more space of to invest in more facilities.176

64.Andrew Carter told us that to minimise displacement “you have to be very focused and clear on the degree to which you can identify new rather than existing [economic activity]”.177 He cited taking market share from ports overseas as an example of how displacement in the UK could be minimised.178 In evidence, we asked about possible concerns in the Republic of Ireland due to this risk. Aidan McMahon told us that he was not aware of any specific views that had been raised to date.179

65.The Chief Secretary to the Treasury described displacement as “a very live risk”.180 He also referenced displacement from overseas, telling us:

To the extent that there is displacement, we would hope that what we are creating is something that causes displacement from overseas to the UK, not displacement within the UK.181

Minister Hall said the Government was asking bidders to explain how their choice of tax sites would minimise the displacement of economic activity and that the tax measures included in the package had been carefully designed to encourage new economic activity. He was confident that the risk was being minimised through the process the Government had designed.182

66.It is not possible to eradicate fully the risk of economic displacement associated with freeports. To minimise it, the Government will need to be careful to distinguish between new economic activity and economic activity moving to a freeport from elsewhere. We recommend that the Government, or the cross-Whitehall governance body, devise a framework for assessing economic activity occurring at freeports, distinguishing between that which is new and that which is relocated. This framework should be used by freeport governance bodies to collect relevant information on economic activity which can later be incorporated into an independent evaluation of the policy.

Illicit activity

67.Freeports internationally have been associated with elevated risks of some illicit activities. The Government identified this as a concern in its consultation document.183 In evidence, we heard that the types of activities included: trade in counterfeit goods; drug trafficking; illegal wildlife trade; smuggling; trade-based money laundering; tax evasion; and corruption.184 Further, the use of freeports for high-value storage, particularly art objects, has been linked to smuggling and illicit money due to poor beneficial ownership records.185 Dr Anton Moiseienko cited analysis published by the World Customs Organization, based on data from over 600 seizures related to freeports, which evidenced these risks. Further, the Organisation for Economic Co-operation and Develop (OECD) reported that the establishment of an additional free trade zone within an economy was associated with a 5.9% increase in the value of exports of counterfeit products.186

68.Professor Robert Barrington, of the Centre for the Study of Corruption, outlined that “Freeports, by their nature, contain a number of ingredients that make them high risk for corruption.”187 Dr Anton Moiseienko told us that while the label of a freeport did not open locations to crime, where there was less of an incentive to collect customs duties, there could be less of a reason to have robust customs controls; and that the culture at freeports was focused on trade facilitation.188 Nonetheless, some witnesses indicated that there were encouraging signs in the Government’s consultation about how it would address these issues. Charlotte Morgan, of Linklaters, told us that due to anti-money laundering provisions in legislation, freeport operators would be obliged to report suspicious financial transactions and be subject to customer due diligence requirements.189

69.The use of some freeports for high-value storage internationally has been linked to smuggling and illicit money.190 We heard a range of views on whether UK freeports should be used for high-value storage. We received one piece of evidence which outlined the benefit this could offer.191 Other witnesses were more sceptical. Alex Stojanovic told us that the Government “should just ban it outright because I do not see what benefit that is going to provide for employment or anything else”.192 Dr Anton Moiseienko felt there were other ways to mitigate the risk rather than outright bans, such as applying the same tax regime to freeports as to the rest of the UK and ensuring that proper information sharing is in place. Charlotte Morgan added that the implementation of anti-money laundering legislation would also help with mitigation.193 In evidence, Minister Hall restated that the Government does not intend to designate freeports for the purposes of high-value storage.194 Charlotte Morgan and Dr Anton Moiseienko also agreed that freeport operators should be required to adhere to the OECD’s Code of Conduct for Clean Free Trade Zones.195 The Government confirmed this would be a requirement and that checks would be completed on freeport operators and businesses to ensure they did not pose undue risk during the authorisation process.196

70.We note the security risks that accompany freeports. We welcome the steps the Government has taken so far to address these in its consultation and bidding prospectus. It is encouraging that freeport operators will be required to comply with the OECD’s Code of Conduct for Clean Free Trade Zones and that the Government does not intend to authorise the use of freeports for high-value storage. Nonetheless, these risks will require ongoing monitoring and enforcement. We recommend that the Government set out how it will seek to do this in its response to this Report.

Subsidy control

71.The Government has stated that UK freeports will be subject to any future domestic subsidy control regime, subsidy control obligations at the World Trade Organization (WTO), state aid obligations in the Northern Ireland Protocol, and subsidy control provisions in any free trade agreements (FTAs).197 The WTO’s Agreement on Subsidies and Countervailing Measures governs the use of subsidies related to goods. Charlotte Morgan, of Linklaters, explained that the Government would have to consider if incentives offered at freeports are subsidies, and if so, if they are permitted or prohibited subsidies.198

72.We also heard that the subsidy provisions in FTAs can go further than WTO obligations. In the case of the EU’s third country FTAs with Korea and Japan, there were new obligations on subsidies covering debt liability of specific enterprises for an unlimited sum or duration and subsidies to insolvent enterprises.199 The subsidies provisions in the UK-Japan Comprehensive Economic Partnership Agreement replicated those in the EU-Japan Economic Partnership Agreement.200 Further, the UK-EU Trade and Cooperation Agreement also prohibits or restricts some subsidies for specified purposes; and EU state aid rules apply to subsidies affecting trade in goods between Northern Ireland and the EU (see Chapter 5).201

73.Developments in the UK’s subsidy control regime could impact the types of support available through the freeports policy and this will require ongoing monitoring.

Labour and environmental standards

74.The bidding prospectus made reference to the UK’s existing labour and environmental standards, stating that:

The government remains committed to ensuring its Freeport model maintains the UK’s high standards with respect to security, safety, workers’ rights, data protection, biosecurity and the environment, while ensuring fair and open competition between businesses.202

Bidders were required to set out how they would support decarbonisation, reach net zero carbon emissions by 2050, and ensure compliance with application environmental regulations and standards.203 Nonetheless, evidence from Wildlife and Countryside Link expressed concern about the potential for a reduction in environmental standards within freeports. It said freeports around the world had been associated with environmental degradation such as water, air and land pollution, and industrial waste. It added that poor monitoring and enforcement also hindered the environmental performance of such areas.204 It contended that there should be no regression of existing standards and requirements.205

75.UKMPG also maintained that ports, including freeports, should adhere to high environmental protection and employment protection standards and that where there were adjustments, these should be around the implementation of measures and not the level of standards.206 Councillor Kevin Bentley referenced the role of local government trading standards and environmental health officers and told us that to maintain standards, there was a need to ensure that staffing was increased or that they were heavily involved in any work occurring at freeports.207

76.We note the Government’s assurances that the policy will maintain the UK’s high labour and environmental standards. We ask that, in response to this Report, the Government set out in further detail how it will seek to monitor this.

120 HM Government, Freeports Bidding Prospectus (November 2020), p 20

123 Oral evidence taken before the Treasury Committee on 22 September 2020, HC (2019–21) 776, Q82

125 Oral evidence taken before the Treasury Committee on 22 September 2020, HC (2019–21) 776, Q85; see also HC Deb, 11 October 2018, col 188WH [Westminster Hall]

128 Dr Peter Holmes (FRP0013)

129 Dr Peter Holmes (FRP0013)

134 HM Government, Freeports Response to the Consultation (October 2020), p 11

135 HM Government, Freeports Bidding Prospectus (November 2020), pp 22–24

136 HM Government, Freeports Response to the Consultation (October 2020), p 13

137 HM Government, Freeports Bidding Prospectus (November 2020), pp 17–18

138 HM Government, Freeports Response to the Consultation (October 2020), p 11

142 Aberdeen Harbour Board (FRP0009)

143 UK Major Ports Group (FRP0012)

147 Ana Gomes (FRP0004), Anonymous submitter (FRP0002), Atkins (FRP0018), Dr Anton Moiseienko (FRP0003), Professor Robert Barrington (FRP0005), UK Free Trade Zone Association (FRP0017)

148 Q224; see also HM Treasury, Spending Review 2020 (November 2020), p 73

149 Q221; see also HM Government, Freeports Bidding Prospectus (November 2020), p 26

150 HM Government, Freeports Bidding Prospectus (November 2020), pp 27–28, 30

151 HM Government, Freeports Bidding Prospectus (November 2020), p 35

152 HM Treasury, Spending Review 2020 (November 2020), p 73

153 UK Major Ports Group (FRP0012)

155 Q21; see also Q53

160 Q58; see also Cromarty Firth Freeport Steering Group (FRP0001), Wildlife and Countryside Link (FRP0006), British Ports Association (FRP0007), UK Major Ports Group (FRP0012), Centre for Cities (FRP0014), UK Free Trade Zone Association (FRP0017)

161 HM Government, Freeports Bidding Prospectus (November 2020), p 25

162 HM Government, Freeports Bidding Prospectus (November 2020), p 29

165 Atkins (FRP0018)

166 UK in a Changing Europe, Freeports (2 March 2021), p 10

167 Dr Peter Holmes (FRP0013)

171 Centre for Cities (FRP0014)

172 Dr Peter Holmes (FRP0013)

173 British Ports Association (FRP0007); see also Cromarty Firth Freeport Steering Group (FRP0001), UK Free Trade Zone Association (FRP0017)

174 Cromarty Firth Freeport Steering Group (FRP0001)

175 Q101; see also Centre for Cities (FRP0014)

184 Qq26, 27, 132; see also Ana Gomes (FRP0004); Anonymous submitter (FRP0002); Professor Robert Barrington (FRP0005); Dr Anton Moiseienko (FRP0003)

185 Q26, Dr Anton Moiseienko (FRP0003)

186 Organisation for Economic Co-operation and Development, Trade in Counterfeit Goods and Free Trade Zones: Evidence from Recent Trends (2018), p 13

187 Professor Robert Barrington (FRP0005)

188 Qq132–133; see also Professor Robert Barrington (FRP0005)

189 Q133; see also Anonymous submitter (FRP0002), Dr Anton Moiseienko (FRP0003), Ana Gomes (FRP0004)

191 Anonymous submitter (FRP0002)

196 HM Government, Freeports Response to the Consultation (October 2020), p 33

197 HM Government, Freeports Bidding Prospectus (November 2020), p 20; BEIS is consulting on the UK’s domestic subsidy control regime, see also Department for Business, Energy & Industrial Strategy, Subsidy control: designing a new approach for the UK (February 2020)

200 International Trade Committee, Second Report of Session 2019–21, UK-Japan Comprehensive Economic Partnership Agreement, HC 914, para 50

201 The UK-EU Trade and Cooperation Agreement: summary and implementation, Standard Note SN09106, House of Commons Library, 30 December 2020

202 HM Government, Freeports Bidding Prospectus (November 2020), p 29

203 HM Government, Freeports Bidding Prospectus (November 2020), p 31

204 Wildlife and Countryside Link (FRP0006)

205 UK Free Trade Zone Association (FRP0017)

206 UK Major Ports Group (FRP0012)




Published: 20 April 2021 Site information    Accessibility statement