The Future of Freeports

Michael Luckman: Good morning everyone and welcome to our second ThinkHouse public sector webinar following on from our devolution seminar last week, which if any of you want to catch up with that one you can pick it up on the website.

It is fair to say that when we started running our ThinkHouse seminars last year that was our first fully online programme and I think we thought it was only going to be a temporary measure but this is now looking as if it has very much turned this into a habit. So I hope this format is working for you.

Obviously some things have changed for the good, I no longer need to show you where your fire exits are or to ask you to set your mobile phones to stun but, and equally of course, you have always got the privilege of turning us off and pretending you are listening when you are not really, so I hope you are taking advantage of that.

There is some housekeeping though. This is a curated discussion via webinar and we will be taking questions both on the way and afterwards but if you could raise your questions by using the question and answer button at the bottom of your screen and I will pick up the questions on the way through and marshal them accordingly.

Despite the changes some things remain the same. We hope to be able to deliver our audience high quality speakers covering a mixed art of regular catch ups but also interesting topical subjects such as this one I think which we think will impact either in your day to day practise, will be useful to you in providing a wider context on significant legal trends. So today's topic is Freeports and in February last year, 2020, the government announced its desire to create or perhaps recreate, as we did have them until very recently, Freeports and has launched a consultation process.

It is hoping the Freeports agenda will form a crucial part of the UK government's now widely known levelling up agenda and of course with COVID-19 also in a significant part of economic restructuring as we come out of the crisis. If you remember the levelling up agenda was a big part of the conservative manifesto and so there is a lot of political will and spirit behind the Freeports initiative.

Following the consultation, bidding for Freeports has already opened. It opened in the middle of November last year and we are expecting there to be a substantial number of interested areas. I think the number is around ten, in addition details around the bidding for the rest of the parts of the union are already eagerly anticipated and Scotland has already come first out of the traps with the announcement of a green port strategy only last week and we expect that to be forming part of a UK wide programme.

That said despite all the political will, the government has largely left the precise nature of how UK Freeports will look to be shaped by the bidders themselves. However it has also provided some useful insights into what their objectives are and how the likely structures might work and we will be looking at some of those aspects today.

I am delighted to introduce to you today Bernardine Adkins from our EU Trade and Competition Team. You will recognise her as a regular ThinkHouse presenter but we now genuflect when we talk to Bernardine because she has done so many BBC and CNN comments on Brexit that she is becoming a bit of a celebrity star in our firm. Joining Bernardine is Jonathan Brufal from our Projects Team who has the dubious privilege of actually having worked on at least two Freeports in the last couple of years. One in Potty Ports in Georgia and the other a free zone in Kigali in Rwanda.

So let us start with you Jonathan, can you tell us a bit about what is a Freeport, what are they intended to achieve and what examples can you give, either locally or internationally?

Jonathan Brufal: Thank you Michael and good morning everyone. I am based in our Dubai office which in itself is a free zone, speaking to from the Dubai International Financial Centre which is a free zone for financial services and professional services and indeed Dubai is probably one of the exemplars of Freeports and free zones across the world.

Taking the first part of your question Michael what is a free zone? There is no agreed definition but I think it is clear that the UK Government is looking to go beyond the traditional characteristics of a Freeport. Traditionally, Freeports are zones within a country's geographic borders that are outside of the country's customs borders. They were designed to reduce administrative burdens of companies operating in them and provide relief and custom duties and to give certain tax incentives. Historically, they were seen to benefit the manufacturing sector but also providers of secure storage.

Looking at manufacturing first, the advantage they give to manufacturers is they allow companies to import intermediate goods into the Freeports avoiding higher tariffs, custom duties and admin. They are then able to add value through the processing and manufacturing process before either importing into the host country or exporting it elsewhere at lower tariffs. A good example of that is the use of Freeports in the US in the car manufacturing industry where the tariffs on components parts was much higher than on finished goods so the Freeports were used for car assembly before the import of the finished product into the US.

The other traditional use of Freeports was around secure storage so goods could be stored in a Freeport for later importation into the country or export elsewhere. The reduction of administrative burdens on those was a key attraction. I think two very famous or perhaps infamous examples of those will be the Freeports in Geneva in Luxembourg which were somewhat notorious for the vast quantities of fine wine, art and other expensive luxury items that were stored in those ports. I think that is quite an important point to touch on because historically that type of Freeport has attracted a lot of criticism and indeed in Geneva's case subsequent admissions that criminal organisations were very much using Freeports as part of their criminal activities. I know Bernardine will come on to cover this, but clearly a key driver in the UK Government's consultation was a desire to avoid lesser activities in the Freeports. But I think that is being mitigated by the fact that the type of Freeports we are expecting to come to market are really all about local regeneration and the levelling up agenda and increasing the economic benefits to local regions.

Michael: Thank you Jonathan. Perhaps we can pick that up with you Bernardine. From a trade and customs perspective, are Freeports all they are cracked up to be do you think?

Bernardine Adkins: As ever with this whole area, it does very much depend upon the configuration of tariffs that are going to apply to this product, because it is easy to conflict Freeports with special enterprise areas. Freeports really are about the lifting of tariffs and also the easement of customs and paperwork.

A Freeport becomes really interesting where there is a high tariff put on an intermediate product or a component and a relatively lower tariff on the finished product, and it is called an inverted tariff structure. The question is does this happen in the United Kingdom? As you know now having left the common commercial tariff as it is called the EU tariff have got our UK global tariff and Sussex University has carried out an analyses and said do we have that inverted tariff structure and it has come to the conclusion well we do not really. So many of component products that will come into the EU are actually zero tariff, something like 60%25 are going to be zero tariffs. It has basically identified dog food and cat food as the areas where would be the most interesting in terms of tariffs.

On the one hand, you can point to say America for example, where they do have a history of free tariff zones and they say that the increment in income is because of this inverted tariff situation, but it does appear that with our current structures that is less likely to be forthcoming within the EU. By all means have Freeports, but not necessarily because of the tariff structures. It might be easements with respect to the paperwork and also the bringing together and perhaps quality infrastructure, a quality workforce et cetera, et cetera, all the benefits that you generally get from an enterprise zone. I think there is a danger of people being somewhat seduced by the branding and people really need to dig into the detail and say what are the benefits?

Michael: Do you mind me asking a question to both of you, I was just thinking about what you have been saying it feels to me as if there is some kind of geographical limitation on Freeports about how much space it could hold because at one level you might say well let us have the whole of the UK as a Freeport, why not and I am just interested, is that right? That is to you Jonathan, that there are limitations to areas where free trade Freeporting can happen? Then possibly when we talk about the bidding process, how do people compete for that because if it is a valuable tool more people may want it then it is actually available for?

Jonathan: I think it is very much clearly set out in the government prospectus for the Freeports part of the bidding process. There are limits on the size of the Freeports. This is where a theoretical prospectus does not quite map on to the practical realities of how geography is laid out but there is a 45km diameter limit on the size of a Freeport. Within that Freeport, you have to have at least one customs site and then at least one tax site. The tax site itself is subject to a limit of 600 hectares.

There are very much size restrictions on each Freeport and one of the issues bidders have is that many of the coastal areas where Freeports are likely to bid in are built around estuaries. They are linear in feature and indeed the industries that would be relevant to the Freeports are split across the estuary, so some bidders are having difficulties optimising the size of the Freeports within the prospectus limits.

Michael: Thank you and as you have touched on there regarding the bidding process, how is the bidding process actually going?

Jonathan: I think the short answer to that is it is going very quickly, as you pointed out in your introduction, the bids are due in next week on 5 February but the government itself only produced the bidding prospectus mid November 2020. It is a very truncated process. After the bids are submitted, they will be assessed during March by the government and they intend to issue a long list of potential ports at the end of March and then to make the final decision on the successful Freeports in spring 2021 with a view that the Freeports will be operational towards the end of this year into early next year and certainly that is an ambitious timetable. The industry is concerned that those type timelines are not going to allow the most optimised bids for the Freeports.

Michael: Jonathan, where do people get the expertise to bid for this? Where are the bidders likely to come from? What would give the government any confidence that they would actually know have to operate a Freeport?

Jonathan: Essentially what the bidding process is obliging people to create is real regionalised public-private partnerships and you can see who needs to be involved in a bidding process, particularly from the government's requirements in the prospectus. Governance is an important feature of Freeports and in fact, part of the success of a Freeport is having the ability to develop a governance structure that is suitable to the Freeport and the type of industry that is within the Freeport.

At a minimum in a Freeport you have to have a suitable operator of the customs site, so that will really be your port operator and obviously the Freeport programme is not just about seaports it can be about airports, rail and inland transport but you do have to have a customs operator. You have to involve local enterprise partnerships on the governance structure of the local MP has to be involved. You will want the private sector companies who will establish themselves in the free zone to be part of the bid and also and I think it is quite important there is a real feature on skills on upskilling in the free zones but also on innovation. There is a real expectation that universities and catapult centres will be involved in the consortia bidding the Freeports. The government has really focussed on that skills improvement and innovation as a key principle and objective of the Freeport's programme.

Michael: Sticking with you again Jonathan if I may, do we think that the prior Freeports, the Liverpool's and Southampton's of this world, they were Freeports up until 2012 I think, do you think they will go back in or do we think they have got an advantage or have things moved on since then with the new paradigm?

Jonathan: I think it is safe to say whilst those regions will undoubtedly want to bid as part of the process what went before is not going to be replicated again. As you touched on, there were seven Freeports in the UK that were established between 1984 and 2012 but the government decided not to renew the licences of those Freeports. It was felt that the advantages they offered at the time had been superseded by general trading conditions in the UK and the low tariff environment, which I think ironically was because of the improvements in EU trade we benefited from, and now as we have left the EU perhaps we need to turn to them again. But I think it is clear from the prospectus that what they are trying to achieve is more akin to what you see in Dubai or in Singapore or in some of the Chinese special economic zones, and that is really the customs benefits and tariff benefits of a Freeport that coupled with low tax environments and investments incentives and that creates something that is known as a super charge Freeport. A classic example in Dubai is the Jebel Ali Freeport, which is a world leading port, but there are a huge number of industries associated with ports but other manufacturing industries that are established there. I think that is very much the direction of travel the government wants to take the Freeport programme.

Michael: Thank you Jonathan. Bernardine, Jonathan namechecked your old friend the European Union there. I understand they are very much swimming in the opposite direction when it comes to Freeports. The European Parliament has actually called for them to be abolished has it not? What is the story there?  Why are we and or they taking a different approach?

Bernardine: Yes, we saw a report back in 2019 saying they ought to be abolished and it is actually part of an international movement, you have the World Customs Organisation and the other organisations that are basically saying these are hives for illicit activity. There is a whole host of activities include narcotics trafficking, people smuggling, illegal ivory trade, VAT fraud, corruption, money laundering, you name it, it seems to allegedly happens at Freeports. For that reason, international people are suggesting that they should be discontinued or scrapped. Obviously, people are looking at what the government is considering and saying is it going to be able to mitigate those particular dangers? I think it is actually largely a question of management. It is a little bit like us as lawyers, it is very much a question of knowing your client frankly. The obvious ones are tax evasion, of stashing away diamonds and art et cetera et cetera. Well there that is inadequate physical security quite frankly, things coming in at the dead of night, so there the government would be proposing that actually there would be a certain amount of money laundering oversight for such where you are stashing away physical goods.

Another thing, for example you avoid using cash, all the usual disciplines that you have in place to guard against mafia type activities going on. I do think one of the criticisms is of what the government is proposing is there is not enough oversight by the border force, there is not enough oversight of HMRC. This can be mitigated by appropriate management by the Freeport operator and possibly a user of a Freeport operator will have reputational issues. Perhaps as a matter of contract, we would put certain key requirements on to the Freeport operator to ensure that this example of adequate protection of the physical parameter of the Freeport et cetera et cetera, adequate oversight and good record keeping. There are all sorts of disciplines that can be put in place in order to make sure that a particular Freeport does not get that reputation, it would not be quite be 'a sunny place for shady people', certainly if it was in the case of the north of England it would be an 'unsunny place for shady people'. I think the danger of criminality and the reputational danger can be mitigated against.

Michael: It is quite interesting is it not, this dynamic between free trade and actually the criminality that runs alongside it, it is quite an interesting thing that. The concept is still I think that UK Freeports are a bit of a regulatory free-for-all and in reality that is part of the attraction is it not? How is this going to work in terms of the commitments under our EU trade and cooperation agreement to the level playing field rules?

Bernardine: This is one of these areas where I recommend people do not read the Daily Express because it is another one of the issues has been over exaggerated. It is totally boring I know and this is only half of the retched thing, getting out of the trade and cooperation agreement. Actually, the level playing field rules which have been so exaggerated, they are about labour and social rules, environmental rules and state aid or it is now called subsidy control. It is actually in a very limited area and you need to distinguish between what currently is where the UK has agreed to hold things as they are, the non-regression area. Then, if for some reason the UK did actually resile from the current situation, certainly under the treaty, there is no level materiality, it would be in breach of its obligations. That is that one aspect. In principle anyway, and these things are very political of course, the UK has agreed not to resile from the current status quo.

Then we move onto the future. So should the UK decide within these particular areas to sink the labour standards for some reason or the environmental standards, then both the EU and indeed the UK could do if the EU went the other direction as well can do what is called a rebalancing exercise. There is an incredibly torturous dispute resolution mechanism under the treaty, which would enable either side to very quickly put in place proportionate limited rebalancing mechanisms to compensate for what needs to be a material distortion of trade and investment as between the EU and the UK. I think actually yes as lawyers we can talk and talk as to how we were, this is very much I think going to be a political question as to whether this is going to be an issue or not. We may find that actually the UK does not want to tank labour standards, in fact if anything it wants to encourage good quality people into these Freeport areas. As Jonathan said, it is about encouragement of innovation and do not forget the UK is still in the Horizon programme which is about R&D. We may actually want to discourage distortions of trade but actually to encourage collaboration with the EU.

Yes, in principle we need to take care around the level playing field rules but I think it can exaggerated as to how far the EU could do something. Ultimately, in terms of a timeline, after four years the EU can look at this and say actually is this working overall? I think it will not necessarily be a big bang as to what the UK is doing in respect of Freeports. I think it is going to be death of a thousand cuts. After four years, we are going to look and say okay what is happening? Are we seeing a distortion of trade and investment beyond what we otherwise would have expected? It is a spot to watch.

Michael: Yes thank you Bernardine. Can I just take a bit of that back to Jonathan? We seem to be worried about the political cross border implications as to whether we were tilting the table to the west rather than to the east. However, my understanding from your introduction and some of the things you are saying is that actually putting ourselves in a better competitive position vis a vis our neighbours is actually a small part of the equation, and I think you have rightly focused in on the levelling up agenda. That political issue being the more important one. Do you think that is a fair assessment?  Are Freeports going to drive that kind of levelling up?

Jonathan: I definitely think that is the overriding objective of the government here. They have announced three objectives for the Freeports. It is clear that the first one is it wants them to become national hubs for global trade and investment across the UK. They want the second as promoting regeneration and job creation. The third is about innovation. All those very much go into the creating clusters of industrial sectors to improve those sectors and it is not about the customs type regimes of old Freeports, so it is about giving industries in local areas tax incentives to develop industry clusters within the Freeports. I think a good example of that, and one the government has talked about quite a bit, is certainly in the north east of England. Creating Freeports that are very much focused around the offshore wind industry and attracting manufacturers, developers of offshore wind farms, be that UK wind farms in the north sea or indeed off the mainland Europe as real innovation, R&D and manufacturing hubs for that sector. I think that really is the focus rather than historic Freeports and the customs benefits that are received there.

Michael: Thank you. Is the UK Government giving financial incentives and breaks to local businesses or local industries? What about state aid Bernardine? Do we not start running into state aid issues, could investors get into trouble there?

Bernardine: Absolutely, that I would say is a big warning to people. It is like look behind you on this because on the one hand we can say well hang on we have left the EU, we have got rid of the EU state aid rules and it was on the statute book that we would actually repatriate or at least domesticate the EU state aid rules and very quietly back in September, the government withdrew that statute.

They very quietly did that and it is like there was no going back. But, people please do not crack open the champagne and say "that's it we're free, we're free of the EU state aid rules" because certainly under the TCA… and I think the UK did very well to get to negotiate this, there is a very loose commitment to principles. But that is dangerous if we are going to say "oh, that's great, we're are going to get a really really really loose system and the government can give whatever bungs of cash towards industry as possible". That is a really dangerous thing to be thinking, because what is expressed in the TCA is very much derived from the WTO principles, which also find themselves expressed in the EU principles.

So actually I would not be surprised if we all flipped back and find ourselves very much in the same situation. Because the government in negotiating this, it has rephrased everything so instead of talking about undertakings, it talks about economic operators. It is almost as if they are trying to sneak all of this back past the European research group (laughter) so they do not realise actually we are keeping things as they are, but we do not know I am afraid. We are in complete limbo in terms of what is this new state aid regulatory system going to be and the government keep saying "in due course, it is going to let us all know what the new regime is going to be".

We know there has to be an independent regulatory body. Query whether it is going to the CMA, I do not think they even know that themselves. Clearly, under the TCA there has to be some form of notification process. It has to be transparent, it has to published. It is there to encourage litigation, so that is something people need to be wary of. If they are receiving some form of tax benefit, in other words the government is saying "I would have taxed you X but now I am going to tax you Y", or "I am just giving you some money" some form of benefits people should be on the alert because the system that needs to be put up will encourage, quite frankly, disgruntled people who feel that "I should have got that" that is happening… you know this has been a distortion, I'm upset, I'm going to challenge that". So, people need to be more wary of this then they ever have been in the past.

So even if assuming that the UK takes a very light touch as it may well be able to get away with, there really is a sense of look behind you. Because, again, one of the sneaky little things that has happened back this summer, is the EU issued a White Paper on subsidiaries to third country companies. So what it is going to be proposing, it is still under… it has finished the consultation but it is looking at various models, various possibilities, so what should it do about companies that are operating in the EU who have been beneficiaries of state aid or subsidies in their home countries.

They basically want them to be under the same form of regulatory oversight or pressure as their own industry. So, I would suggest to people that there is a little bit of self‑help here, yes it would be great and lovely to get the state aid, but they need to be asking themselves to what extent are we going to be operating in the EU? How vulnerable are we going to be to attack under this new legislation? So, I think people really need to keep a careful if they are in that in that situation. Keep watchful eye on what is going on in the EU.

So, maybe there is a case there for checking, double-checking "is this something that would pass muster under these future hypothetical rules in the EU?"  So people, I am afraid, need to do a lot of, I know it is very dangerous to do that nowadays, crystal ball gazing and looking down the track as to what is going to become from a regulatory perspective, if they wish to put these goods into the EU.

So, to the extent of which there is a level of oversight, they are absolutely fine and the support they have got is something which would pass muster under the EU state aid rules as well. That is quite a long explanation (laughter).

Michael: No, no, for what will no doubt be quite a knotty problem, I was thinking of Jonathan's example of a wind farm hub up in Scotland somewhere, and if you are a part of the European wind farm manufacturing industry or developer industry you would be quite bothered about all of that being done a bit cheaper up in Scotland than here, would you not?

Bernardine: Absolutely, what I am thinking is there is a certain irony. I would not be surprised if a lot of these investments, and the regulators that have been put in place, I would not be surprised if at all they are subject to more scrutiny over in the EU. And now they find they are scrutiny too in the UK and already we have got the European Parliament making noises about carbon pricing in the UK post Brexit.

This is one of those ironies that people are very conscious in the EU of the UK as a competitor which is fine, but an unfair competitor. So, I think we are going to see an enhanced level of scrutiny and we need to be aware of that, cognisant of that, and just to manage that risk.

Michael: Yes, thank you. To the audience, I am on my last formal question, just to reminder that if you want to ask any questions of Jonathan or Bernardine please use the Q&A button at the bottom of your screen.

So, Jonathan, this is something that the government clearly wants to do. I think it has a clear idea of what it wants it to achieve. But, overall with your experience, having seen these zones around the world and indeed living in one. Do you think the UK Government's plans are ambitious enough or are there some sort of special treats out there that you think we ought to be thinking about and adopting here?

Jonathan: No, my personal view, I think it is an ambitious programme. I would say this to the companies I speak to about the programme who are potentially bidding on this. Some of the ambition is not carried through in the detail of the prospectus, so there is a lot to be developed and to be agreed and it will very much depend on the government's attitude to its discussion with its long listed bidders as to how it develops the Freeports.

But the direction of travel is very much in creating regional industry zones within the Freeports. So, I think that shows the ambition and there is a desire to get on with it. But I think perversely the desire to get on with it might unwittingly hamper some of the ambition of the programme, of certainly bidders, have only been given since mid-November to submit their initial bids by next week. They are very much of the view that if they had more time, they would be able to produce better quality bids. There are, as I touched on earlier, there are a lot of constituents parts to the bidding consortium and getting everyone aligned on a view from an outline business case and the proposal is difficult in that short space of time.

So not only do bidders feel they would have benefited from more time from discussions within their bidding consortium, they also feel that the programme would have benefited from more collaboration between different bidders in different locations. Such that you develop cross Freeport specialisms and taking into account regional differences and where industries are located. So, that has been a frustration for bidders.

We touched on earlier the size limits on the bids is creating some practical difficulties about mapping out optimum structure through a Freeport. I think the market thinks that the cap on ten which the government has kind of reserved the right to exceed if it wants to but, if you believe the market rumours, there are over 40 bids out there for the programme and there will be some, obviously, a large number of disappointed bidders. So, that is a frustration. The market feels the UK could support more Freeports and I think there is also a concern, in the bidding community, that the levelling up agenda might take precedence over the fair and transparent bidding process.

So, I know there are concerns, particularly in the south of England, that maybe their bids are inherently prejudiced by the fact that their areas might not be at the top of the levelling up agenda. But, subject to those reservations, definitely I think it is an ambitious programme.

Michael: Thank you Jonathan. We have got two really good questions from the floor. This is from John. Thank you John. If the tariff relief does not have much potential, is the UK Government just packing measures already available? What is really new here? If a bidder is not successful, could they not get most, if not all, they need by applying for the programmes individually? I will probably throw that one at you first, Jonathan, if I may.

Jonathan: I think that is definitely a risk. A lot of the features of the Freeports are common to enterprise zones and so there are similar sort of programmes available to encourage this type of investment. I do, however, think there is a type of opportunity, investment opportunity, around the coastal areas of the UK and around ports in particular that will be unique to the type of development we see coming through, that I think maybe could not be achieved elsewhere in enterprise zones.

Michael: Thank you Jonathan.

And this is from Daniella, who describes herself as a young person, I cannot remember how that feels, I am afraid Daniella. Daniella is very curious that if Freeports will benefit in the UK in the long term or not, or whether this is just a short term initiative which is likely to be written off in the future? Bernardine, she is alive to the direction of travel in the UK and the fact that it might be a global downer on this kind of initiative.

I will start with you then Bernardine, if I may and then invite Jonathan to comment.

Bernardine: That is right. I think perhaps Freeport is a bit of a misnomer, what I think is important for these new initiatives is that they do have adequate supervision and oversight to mitigate against the various risks and for the various reasons such as fraud, corruption and stashing away works of arts or diamonds. So, I think it is unmanageable.

Michael: So, in your terms though the success of the concept may in fact in part be determined by that strength of governance.

Bernardine: Yes.

Michael: And if the Freeports show themselves able to govern appropriately with the appropriate political support, then the concept may survive.

Bernardine: Yes, absolutely and it is down to appropriate operations by the Freeport operator, but also the users making those demands on the Freeport operator themselves.

Michael: Yes, thank you. Jonathan, anything you want to add to that.

Jonathan: No, I just echo the fact that governance is critical to the success of these projects and whilst, what appropriate governance is not defined in the prospectus, it will be a key stage in the development of every successful bid. Indeed, the government will be providing separate funding to develop appropriate governance structures it will need to fit into national policy. And I think the share state holders in a Freeport will ensure that there is robust governance. With robust governance I think you secure the future of the port and obviously any potential investors coming into a Freeport are going to have to be satisfied with the governance structures to commit to long term investment in the zone.

Michael: Well, Jonathan, Bernardine, thank you both very much. That was a fascinating discussion on what is going to be an interesting area for development over the coming years. I am particularly interested, personally, in the levelling up agenda. It is a really important agenda for the future of the UK and perhaps the change in the political landscape of the UK which is clearly the way I think the Conservative manifesto seems to be addressing it.

And thank you for letting us all know as to where we need to stash our international art collections in the future (laughter). I think I have a small print somewhere I could put away.

But thank you both and it has been a very interesting discussion and thank you to the audience for joining in and I hope you have enjoyed it too. Thank you.