The Economist - UK (2021-11-20)

34 Britain TheEconomistNovember20th 2021

Place-basedpolicy

On the dock

E

ntertheportofTilburyandyouwill

see  heaped­up  building  materials,  im­

ported, processed and waiting to be carted

to construction sites. With London nearby

and  a  pandemic­related  increase  in  de­

mand  for  home  extensions,  business  is

booming—or  rather,  beeping,  as  vehicles

lift and pile containers into stacks. Things

quieten as you go east to land that is part of

Thames Freeport, one of eight experiments

in  boosting  deprived  areas.  The  hope  is

that  when  generous  tax  breaks  become

available  for  new  investors  on  November

19th, the hubbub will spread.

More than 5,000 tax­advantaged zones

are dotted around the world, with varying

incentives  and  eligibility  rules.  Britain’s

freeports will offer simpler customs proce­

dures  as  well  as  relief  from  stamp  duty,

employer payroll taxes, business rates and

corporation  tax.  Politicians  hope  all  this

will  support  innovation,  trade  and,  in  the

inequality­slaying  phrase  of  the  moment,

“levelling up”. A report in 2016 by Rishi Su­

nak,  then  a  backbencher  and  now  the

chancellor, claimed that if Britain replicat­

ed  America’s  success  with  its  free­trade

zones, it could create 86,000 jobs.

It is easy to scoff at such boosterism. Mr

Sunak  counted  all  jobs  within  any  Ameri­

can  free­trade  zone  as  created  by  its  exis­

tence—a heroic assumption, since pre­ex­

isting factories can apply for special status.

More  generally,  sceptics  point  to  three

risks. What if businesses stay away? What

if  any  new  activity  would  have  happened

anyway? And what if the sites suck invest­

ment  from  places  even  more  in  need?

Some of these are in tension; if no one in­

vests, freeports will not cost the exchequer

much.  But  common  to  all  is  the  idea  that

they will fail to encourage new activity.

Britain’s  experiences  with  place­based

policies  have  been  disappointing.  Last

month the Office for Budget Responsibility

(obr),  a  government  watchdog,  pointed

out  that  an  older  policy  of  enterprise

zones, which offered tax breaks for inves­

tors  in  struggling  places,  cost  around  a

quarter  as  much  as  expected,  which  sug­

gests that it had “smaller impacts than ini­

tially hoped”. An evaluation by the Centre

for Cities, a think­tank, found that the jobs

created were overwhelmingly done by peo­

ple  with  low  skills.  Drawing  on  interna­

tional  evidence,  the  obr assumed  that

freeports  would  mainly  move  economic

activity around rather than stimulating it,

and would cost the taxpayer around £50m

($67m) in the 2022­23 fiscal year.

Freeports  offer  a  greater  array  of  bene­

fits  than  enterprise  zones  do.  But  British

businesses  can  already  defer  tariff  pay­

ments  by  parking  goods  in  bonded  ware­

houses,  or  escape  them  altogether  for

items that are processed and immediately

re­exported  through  special  customs  ar­

rangements. If freeports really make a dif­

ference,  it  will  be  because  of  tax  breaks.

Lewis Atter of kpmg, an advisory firm, says

these could be worth 15­25% of the cost of

constructing  a  new  factory.  lmWind,  a

subsidiary  of  ge,  made  its  investment  in

Teesside  contingent  on  the  area  succeed­

inginitsbidtobea freeport.BenHouchen,

themayorofTeesvalley,saystalksareun­

derwaywitharound 30 otherbig,interna­

tionally footloose businesses. Although

somesitesneeddecontaminatingandde­

veloping,MrAttersaysgroundmaybebro­

kenonsomeprojectsearlyinthenewyear.

Thequestion,then,ishowmuchofthis

activitywouldhavehappenedanyway,ei­

therinfreeportsorelsewhereinBritain.In

timeTilburyportwouldhaveexpandedto

servethehungryLondonmarket.Thereare

plansforeducationprojects,bothtodevel­

oplocals’skillsandtopersuadeyoungsters

thatworkinginlogisticsreallyisattractive.

Butthesecondofthosesitsuncomfortably

withthenotionthatfreeportswillabsorb

labourthatwouldotherwisehavesatidle.

Anda cynicmightpointoutthatcompa­

nies have every incentiveto claim that

theirinvestments arecontingentontax

benefits.lmWind,forexample,wasalrea­

dyfacingpressuretostrengthenitsBritish

supplychainbecauseofseparatecommit­

mentstobringproductiononshore.

Thegovernmenthascomeupwithits

ownwayofmakingsurethatfreeportsdo

notmerelypullinactivitythatwouldoth­

erwisehavehappenedelsewhere.Officials

havespentrecentmonthshagglingwith

freeportoperatorsoverwhichsectorswill

be eligible for tax benefits. These vary from

location to location. In theory, that means

each  can  play  to  its  strengths.  Thames

Freeport will specialise in logistics and ad­

vanced  manufacturing  (its  site  in  Dagen­

ham  is  linked  to  a  big  Ford  engine  plant).

The industries favoured include chemicals

processing,  advanced  manufacturing  and

low­carbon energy production. In the Wil­

ton site of the Teesside freeport, chemicals

processing  will  be  eligible  for  the  tax

breaks. Low­carbon energy sources will be

encouraged at the Teesworks site.

So far this micromanagement is pretty

opaque, at least to potential investors, who

must  contact  each  freeport  company  or

landowner  to  see  whether  their  plans

would qualify under the terms negotiated

with the government. This may reduce the

risk that freeports merely displace activity,

at some cost to the public purse. But it does

nothing to reduce the risk of a tax bung for

investors  who  would  have  made  invest­

ments  anyway.  And  the  more  prescriptive

freeports  are  about  who  qualifies,  the

greater the chance that genuinely new in­

vestment will be shut out. 

Discrimination  is  the  object  of  free­

ports, as the government tries to shepherd

businesses  into  busy,  efficient  clusters.

The hope is that any casualties will be over­

seas, in countries too slow or too stingy to

match  Britain’s  competitive  tax  offering.

But  as  word  spreads  of  which  sectors  and

companies  are  eligible  and  which not,

businesses  closer  to  home  may  conclude

that the whole policy is simply unfair.n

TILBURY

Freeports are a gamble. The government istryingtolimittherisk

London

Source: UK government

Thames

Solent

Plymouth

Felixstowe

and Harwich

East Midlands

Airport

Liverpool

Humber

Teesside

Exclusive clubs

England, planned freeport

locations, March 202

Do we qualify?