Engines of growth

The success of an FTZ depends on various factors like attracting investments, level of exports and foreign exchange, linkages with the domestic economy, apart from political stability, strategic location, quality infrastructure and marketing advantages. Janaki Krishnamoorthi explores the success factors of FTZs in the UAE and what should India do catch up momentum.

Free Trade Zones (FTZs) have come to be recognised as gateways to emerging markets. Apart from generating additional economic activity, attracting investment from domestic and foreign resources, these zones boost exports and generate employment opportunities. In developing countries, it is also considered as one-stop solution for solving several issues like poor infrastructure, unemployment, shortcomings arising out of multiple controls and clearances etc, in a relatively short period because of the focused approach on development of a specific area by pooling resources and expertise.

While FTZs provide a medium for foreign companies looking for cheaper and efficient location to establish their offshore business, it also allows the local industries to improve their export under relaxed tax and tariff policies. In short, FTZs provide a dynamic, thriving and secured business environment with numerous benefits. FTZs no doubt help in creating a balanced economic growth in a country but their success or failure depends on various factors.

Success formula
The success of an FTZ is measured in terms of the investments it has been able to attract, level of exports and foreign exchange, as also backward and forward linkages with the domestic economy. No doubt, there are certain ingredients that contribute to the success of FTZs which include political stability, strategic location, quality infrastructure and marketing advantages.

"General success factors for FTZ around the world encompass some basic features," avers SGK Kishore, Chief Executive Officer, GMR Hyderabad International Airport Pvt Ltd (GHIAL). "They include a stable political environment as investors prefer stability. A move towards free markets is essential in attracting foreign companies to invest. Joint venture with local partners is another factor as foreign investors acquainted with local customs are successful in dealing with other local businesses and government officials.

Creating awareness about the FTZ benefits, operational efficiency with seamless operational processes, compliances and procedures are the other factors." GHIAL recently established India’s first airport-based Free Trade Zone (FTZ) at Rajiv Gandhi International Airport Hyderabad (RGIA).

Vijay Kalantri, Chairman and Managing Director, Dighi Port adds to the list: "Efficiency of distribution, economising logistic and operational cost, and establishment of a transhipment hub are the other criteria that govern the decision of an investor/developer." Dighi Port is developing a port-based FTWZ, a joint venture of Balaji Infrastructure. The FTWZ’s initial development is complete at an investment of approximately Rs 200 crore.

In fact, the above listed factors have largely been the basis for the successful operation of FTZs in the UAE. The fact that these cities have sprung up out of the desert is a success story that other emerging economies are trying to emulate. In this context, Jebel Ali Free Zone (JAFZA) is considered the leader and innovator of FTZ in the UAE. "Since its establishment in 1985, it integrated the seaport to the free zone to give a seamless operation. Later in 2012, it enhanced the standards by connecting the Jebel Ali Port/JAFZA with DWC airport with a seamless customs bonded road called Dubai Logistics Corridor," reveals Adel Al Taheri, Senior Manager-ùSales, Skycity – Abu Dhabi Airports Business & Logistics Park.

The geographical location of UAE allows them to act as a bridge between three continents: Asia, Europe and Africa. For instance, Dubai’s strategic location between the east and the west has made it the leading hub.

Elaborates Adel Al Taheri, "UAE’s strategic location, its political and economic stability with sophisticated banking system, open and free economic system with minimum government control and regulation, and competitive cost structure are the major factors that have contributed to the success of FTZs in the UAE. In addition, UAE government’s policy of investing heavily in real estate, transport, telecommunications, energy and industrial infrastructure has enabled it to have one of the best infrastructure facilities and excellent living conditions which has also contributed significantly to international business." Abu Dhabi Airports Free Zone (ADAFZ) was formed in 2010 and started licensing companies in 2012 spread across three airports Abu Dhabi International Airport, Al Bateen Executive Airport and Al Ain International Airport.

The UAE government’s policy framework has also played a major role, says Peter Fort, Chief Executive Officer, Ras Al Khaimah Free Trade Zone (RAK FTZ). "Apart from the usual benefits, UAE FTZs’ success can be attributed to the UAE government’s policy reforms to promote sustainable growth and increase competitiveness, such as its liberal tax policy, the US dollar peg, and various trade agreements."

Progress impediments
Equally clear are the impediments that stand in the way of successful FTZs  absence of clear policy framework, red tape, lack of effective promotional policies, lack of expertise among investors and developers, and inadequate infrastructure. These in fact are the causes for the not so successful operation of FTZs in India, although the Indian government had the foresight to recognise the effectiveness of FTZ in the mid sixties. It was in India, that Asia’s first FTZ, Kandla FTZ, was set up in 1965. But India failed to cash in on this advantage and other assets like availability of skilled labour, English speaking population etc, due to loss of focus and lack of progressive policy, leading to several later entrants overtaking.

"Nearly 70 per cent of exports from Dubai are for destination India. Most foreign companies operate out of Dubai simply because we have not done enough to get the policy frame work right," laments Sunil Rallan, Managing Director, Chennai FTZ, the first notified FTWZ in India, set up in 2008 with an initial investment of around Rs 200 crore near Sriperumbudur in Tamil Nadu. "The state and Central governments and all the stakeholders know what is to be done. However, the will to do it is missing. In theory, the Indian SEZ Act and Rules were meant to be more efficient than Dubai or Singapore. However, we have lost focus and simply left the FTZs to drift without any directions." The Free Trade and Warehousing Zones (FTWZs) in India are a special category of Special Economic Zone and are governed by the provisions of the SEZ Act and the Rules. But since the requirements of FTZs are different from those of SEZs, the industry pundits emphasise the need to modify these rules.

"There is lack of policy clarity at both the Central and state levels. There are no operational guidelines laying down the procedures to be followed for the transactions," reveals Rallan. "Some of the issues have been partially overcome by constant interaction with the Department of Commerce but there still remain some unresolved issues. The Tamil Nadu SEZ policy of 2003 while setting laudable milestones and sound frame work has not been put into practice either in letter or spirit. This continues to be a major challenge and sour point for investors."

In addition, regulatory bottlenecks, land acquisition, frequent change in policy frameworks are the other challenges, states Kalantri. "Further, the overall integrated infrastructure development is not at the same pace and isolated development sometimes are land-locked, thereby defeating the purpose of FTZs," he adds.

Not that the Ministry of Commerce and Industry is unaware of the issues. In fact, it has held several meetings with the stake holders and has worked out the guidelines for FTZs/FTWZs. But they are yet to be finalised and implemented. (See Ministry’s response in box)

Future Forward
Evidently, all stakeholders including the government in India and in other countries where FTZs have failed to take off need to call for a reassessment of existing measures and introduce new reforms. Even those FTZs who have been successful are also taking a re-look in the increasingly competitive environment. Since all FTZs offer more or less similar incentives and facilities, a time has now come for them to explore innovative structures -û in legal, marketing and leasing to woo investors.