EENTER THE Tilbury Harbor and you’ll see building materials piled up, imported, processed and waiting to be transported to construction sites. With London nearby and an increase in demand for home extensions linked to the pandemic, business is booming – or rather, beeping, as vehicles lift and stack containers in piles. Things calm down as you head east to land which is part of Thames Freeport, one of eight experiments aimed at boosting disadvantaged areas. The hope is that when generous tax breaks become available to new investors on November 19, the hubbub will spread.
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Over 5,000 tax-advantaged zones are scattered around the world, with varying incentives and eligibility rules. UK free ports will offer simpler customs procedures as well as relief from stamp duties, employer payroll taxes, trade rates and corporate income tax. Politicians hope all of this will support innovation, trade and, to use the term that kills inequalities of the moment, ‘leveling up’. A 2016 report by then-backbench MP and now chancellor Rishi Sunak claimed that if Britain replicated America’s success with its free trade zones, it could create 86,000 jobs.
Such boosterism is easy to laugh at. Mr. Sunak counted all jobs within an American free trade zone as created by its existence – a heroic assumption, since pre-existing factories can apply for special status. More generally, skeptics point to three risks. What if companies stayed away? What if a new activity had taken place anyway? What if sites suck investments from even more needy places? Some of them are in tension; if no one invests, free ports will not be expensive on the chessboard. But the idea common to all is that they will not succeed in encouraging new activities.
Britain’s experiences with territorial policies have been disappointing. Last month, the Office for Budget Responsibility (OBR), a government watchdog, pointed out that an old corporate zones policy, which offered tax breaks to investors in troubled places, was costing around a quarter of the expected price, suggesting it has had “lower impacts than initially hoped for”. An assessment by the Center for Cities, a think tank, found that the jobs created were largely filled by low-skilled people. Based on international evidence, the OBR assumed that free ports would primarily displace economic activity rather than stimulate it, and cost the taxpayer around Â£ 50million ($ 67million) in fiscal year 2022-2023.
Free ports offer a greater number of advantages than corporate zones. But UK businesses can already defer payment of customs duties by guaranteeing goods in bonded warehouses, or bypass them altogether for items that are processed and immediately re-exported through special customs arrangements. If free ports really make a difference, it will be thanks to tax breaks. Lewis Atter from KPMG, a consulting firm, says these could account for 15 to 25% of the cost of building a new factory. LM Wind, subsidiary of GE, made its investment in Teesside conditional on the region’s success in its free port offer. Ben Houchen, the mayor of Tees Valley, said talks were underway with around 30 other large independent international companies. Although some sites need to be decontaminated and developed, Mr Atter says the ground could be opened for some projects at the start of the new year.
So the question is to what extent this activity would have taken place anyway, whether in free ports or elsewhere in Britain. Over time, the port of Tilbury would have grown to serve the hungry London market. Education projects are planned, both to develop the skills of the inhabitants and to persuade young people that working in logistics is really attractive. But the second of these is uncomfortable with the idea that free ports will absorb a workforce that would otherwise have remained inactive. And a cynic might point out that companies have every interest in claiming that their investments are contingent on tax breaks. LM Wind, for example, was already facing pressure to strengthen its UK supply chain due to separate commitments to bring production ashore.
The government has found its own way to ensure that free ports do not simply attract activities that would otherwise have happened elsewhere. Officials have spent the past few months haggling with free port operators over which sectors would be eligible for tax breaks. These vary from place to place. In theory, this means that everyone can play to their strengths. Thames Freeport will specialize in advanced logistics and manufacturing (its Dagenham site is linked to a large Ford engine plant). Preferred industries include chemical processing, advanced manufacturing, and low-carbon power generation. At the Wilton site of the Teesside Freeport, chemical processing will be eligible for tax breaks. Low carbon energy sources will be encouraged at the Teesworks site.
So far, this micromanagement has been fairly opaque, at least to potential investors, who must contact each freeport company or landowner to see if their plans would be eligible under terms negotiated with the government. This can reduce the risk that free ports will only displace activity, at some cost to the public purse. But that does nothing to reduce the risk of a tax bail for investors who would have made investments anyway. And the more normative the free ports are with regard to eligible people, the greater the chances that genuine new investments will be excluded.
Discrimination is the object of free ports, as the government tries to steer companies into active and efficient clusters. The hope is that the victims will be overseas, in countries too slow or too stingy to match Britain’s competitive tax offer. But as the word spreads across eligible and non-qualifying sectors and businesses, businesses closer to home may conclude that the whole policy is just plain unfair. â
This article appeared in the Great Britain section of the print edition under the headline “On the Quay”