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Free trade zones are not free- for- all

BUSINESS DAY, NIGERIA, 21/04/2017. 

Ibrahim B. B. Shettima

“The institutions a society develops or fails to develop…provide an important indicator of that society’s capacity for development.” – Pranab Bardhan (University of California, Berkeley).

The Nation newspaper of February 7th, 2017 featured an interesting piece on the despicable degeneracy plaguing the regulation of Free Trade Zones (FTZs) in Nigeria. At the heart of the brouhaha is the all-important question of which agency has authority to superintend over the specialised free zones, namely, the Oil & Gas Free Zones, as against the general purpose free zones.

A Free Trade Zone is a specially delineated territory within a country where economic activities carried out therein are not covered by the fiscal and monetary policies that prevail in the host country, referred to in trade parlance as the Customs Territory. Such exemptions generally cover taxes, import duties and foreign exchange regulations, among others. Irrespective of the nomenclature in use—nomenclature varies from one jurisdiction to another— free zones have become incubators of economic growth and development and with their attractive package of incentives, they constitute a veritable means of attracting foreign direct investment and enhancing national competitiveness. In a nutshell, the overarching objectives of a FTZ are enhanced foreign exchange earnings; cultivation of export orientation and employment generation.

If we discountenance the ancient and isolated free trade zone practices—Greece in 166 BC; Rome in the first millennium and Northern Europe in the middle ages—though precursors to FTZs as we know them today, Shannon Free Zone of Ireland, established in 1959, lays claim to being the first modern FTZ. It is however, a well-known fact that FTZs were authorised in USA in 1934 and the first FTZ regulations in Latin America were enacted in the 1920s. But the largest and unarguably the most successful free zone in the world is the Jabel Ali Free Zone Authority (JAFZA) founded in Dubai in 1985. Today, over 3000 FTZs spread across 116 countries account for about 45 million jobs.

At this juncture, we undertake a review of the licensing, regulatory and supervisory models that obtain in the global scene in order to have a deeper understanding of the turf battle playing out in Nigeria presently. In the USA where FTZs are referred to as Foreign Trade Zones, the existing 230 zones and sub-zones are under the supervision of Customs and Border Protection (CBP), but the authority to licence and prescribe rules and regulations lies with the Foreign Trade Zone Board. Thus all the regulatory responsibilities that constitute the subject of discord in Nigeria are vested on this Board jointly run by the Departments of Commerce and Treasury. In line with the democratic tenets of checks and balances, the Board submits annual report to the Congress.

In the UAE in general, and Dubai in particular, the regulation of FTZs is based on a framework of rules peculiar to the free zone concerned. Thus, there are as many authorities as there are free zones, notable examples being, Jabel Ali Free Zone Authority (JAFZA) and Dubai Airport Free Zone Authority (DAFZA). This decentralised system notwithstanding, the pragmatic and visionary leaders of Dubai, in 2001, deemed it necessary to consolidate three contiguous entities into one. Thus the merger of Dubai Ports Authority (DPA), Customs Authority and JAFZA gave birth to the Ports, Customs and Free-zone Corporation (PCFC), a sort of consolidated supervisory authority akin to what obtains in the financial services sector of many jurisdictions.

The Republic of Ireland is home to the world’s first duty free airport, Shannon Airport, an integral part of Shannon Free Zone. Its regulatory body, the Shannon Free Airport Development Company, in addition to establishing the world’s first industrial zone, marketed the airport as a training base, refuelling stop, maintenance centre and a destination so successfully that in the 1950s it accounted for over 50% of transatlantic refuelling stops for airlines . Regulation in Ireland is under a government agency, Shannon Development, now renamed Shannon Enterprise, to reflect its commercial orientation, but retaining responsibility for the free airport zone and the industrial free park.

This exposition on the globally trending models of free zone regulations provides us with a basis for an interrogation of the regulatory regime under which free zones operate in Nigeria. It is obvious from the extant laws that a centralised regulatory regime exists in Nigeria under Nigeria Exports Processing Zones Authority (NEPZA), with a 1992 establishment law. The government however, deemed it fit to establish another free zone authority in 1996 to regulate the only specialised oil & gas free zone in Nigeria then, Onne/Okpokiri Oil & Gas Free Zone. Hence the name of the authority, by force of law was, and remains,” Oil and Gas Export Free Zone Authority” (OGEFZA), without any need to pluralise the word, zone.

The immediate source of the raging battle to control the second generation oil and gas free zones is traceable to an alleged Executive Order of 2014 and the impending amendment to the law establishing the Oil and Gas Export Free Zone Authority. The first question that comes to mind is whether the principal law contains a provision, omnibus or otherwise, to accommodate recourse to executive orders. The second question relates to the economic benefits of the proposed amendment as against territorial supremacy between regulatory agencies. And yet the third issue concerns the need for a transitional arrangement, in the event that territories would be ceded either by force of law or expediency of an executive order.

In doing justice to these issues, it is germane to examine the intendments of the relevant laws, albeit through the untrained mind of a layman. First, it is obvious that the NEPZA law is an encompassing law whose mandate covers licensing and regulation of integrated free zones as specified in schedule 3 of the law. Interestingly, from the newspaper article referred in the opening paragraph of this piece, two of the free zones vociferously opposed to being subsumed under the authority of OGEFZA, are integrated free zones, namely, Snake Island Integrated Free Zone (SIIFZ) and Lagos Deep Offshore Logistics (LADOL) Free Zone.

On the other hand, it appears that the OGEFZA law was intended to licence and regulate operations in a solitary free zone, the Onne/Okpokiri Oil & Gas Free Zone. It is, presumably, for this reason that the law provides for a representative of the host state government, Rivers, to serve on the Board of the Authority. On the other hand, the NEPZA law does not provide for a Board representation for the Cross River state government for playing host to the premier free zone in Nigeria, Calabar Free Zone. Another proof that OGEFZA is intended to cover a specific zone in a specified geographical location can be gleaned from the required wordings of the trade documents in case of imports and exports. Section 17 of the December 2003 subsidiary legislation requires the relevant Bill of Lading to be marked, “Oil and Gas Free Zone, Onne, Port Harcourt, Rivers State”.

If the specificity of the OGEFZA law is water-tight, one may wonder at the effrontery of its management in making a foray into NEPZA’s mandate, a situation akin to seeking to milk the cow fattened by another. It is however, regrettable that the law in question seems to suffer from a lack of internal consistency. This is because section 5(2) mandates the authority to take over the functions of NEPZA as they relate to export of oil and gas. Even at that, the power conferred on OGEFZA under the said section is explicit on exports, with a loud silence on imports. The law is indeed an ass!

Here lies the remote source of the audacity of OGEFZA, beyond the two reasons alluded to earlier. But which of the regulatory options confers optimum economic benefit to Nigeria? Broadly speaking, we are faced with three models, namely, Unified Regulation which brings all free zones under one authority irrespective of specialisation; Decentralised Regulation along specialisations irrespective of location; Decentralised Regulation defined by geographical contiguity. Without putting a finger on numbers, the objective criteria for optimum economic benefit should include ease of doing business in order to cultivate and retain investors’ confidence; minimum administrative cost; balance between geographic contiguity and streamlining free zone services; strategic complementarity, among others. If building an institution that delivers development is our focus, these are the issues that commend themselves to our legislators as the amendments of the relevant law proceed apace.

Thus, the National Assembly must be wary of unwittingly entrenching, in the course of amending the law, the alleged monopolistic hold of a certain maritime service provider, as insinuated in the article under reference. On the contrary, the legislature will do well to leverage on the amendment process to open such services to competition.

In the meantime, the supervising ministry of the warring agencies, the Ministry of Industries Trade and Investment (MITI), must hasten to arrest the ugly altercation, poignantly dubbed a “free-for-all”, arising from the precipitate action of the OGEFZA as this portends grave damage to the confidence of investors. Even if the government is inclined to give force to the rather ambiguous provision of section 5(2) of the relevant law, it should tarry awhile, in deference to the impending amendments.

In any case, any change in policy that is not preceded by transitional arrangements can only be implemented in fits and starts, depicting the dysfunctional state of our institutions. And this is what holds sway at the moment, a situation whose remedy lies on the rigour, diligence and patriotism the legislature brings to bear on the process of amending the laws in question.