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Can freeports be progressive?

A new report claims these low-tax zones don’t have to trigger a race to the bottom.

By Jonny Ball

In 2016 a young Conservative MP authored a paper for the Centre for Policy Studies. Rishi Sunak had only been elected the year before, but he was already making a name for himself as a competent, promising Brexiteer who would have a bright future in the party. Grandly referring to “the ancient Mediterranean… Delosian model” of 500BC, he claimed that Brexit provided an opportunity to create a host of “special economic zones”.

These zones – otherwise known as freeports – would be a central feature of the Conservatives’ 2019 levelling up agenda, to be located in “areas outside London where economic need is higher”, and stimulating economic activity by offering significant reductions and deferrals on import and export duties, tariffs, business rates and other corporate taxes.

As projects that focus on development led by the private sector, deliberately forgoing potential public revenues, and setting out to narrow the tax base, freeports have often been associated with the libertarian right. During Liz Truss’s short-lived premiership, an expansion of freeport-style “enterprise zones” was mooted, only later to be quietly cancelled by her successor after bond markets reacted badly to Kwasi Kwarteng’s unfunded tax giveaways. In the New Statesman, Mathew Lawrence, director of the Common Wealth think tank, recently reviewed the historian Quinn Slobodian’s work on “crack-up capitalism”, based, he says, on “zones where normal practices of taxation were suspended” and “investors dictated their own rules”, creating “enclaves of market radicalism to leverage wider systemic change”.

But despite the free-market rhetoric, a new report from the Centre for Local Economic Strategies (Cles) think tank, published today (18 July), sets out a blueprint for how freeports can be established without a slash-and-burn approach to regulation and employment law. Future Freeports looks at policies and practices employed in three case study areas – Plymouth and Devon, Liverpool City Region and the Celtic Freeport in South Wales – to assess how the implementation of freeports can be managed differently.

[See also: Freeports won’t save Ben Houchen]

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“Freeports are ultimately an imperfect tool,” Sean Benstead, a senior researcher at Cles and author of the report, told Spotlight. “In an ideal world, I’m not sure anyone in the progressive economics sphere would advocate for giving tax exemptions to companies to try and attract investment… But what we’re seeing suggests that they’re here to stay.”

In some countries with more devolved fiscal powers, neighbouring jurisdictions often compete with each other to woo international investors such as Amazon via corporate tax cuts and subsidies. Critics have derided this “race to the bottom” that deprives public bodies of much-needed funds and leads to a “displacement” of private capital, which simply moves from one geographical area to another. In the UK the Institute for Fiscal Studies has warned of similar dangers with the freeports agenda.

Nevertheless, £200m has been earmarked for their development over the coming years. “In the context of funding cuts, increased costs and cost of living pressures,” Benstead says, this is “one of the few tools that local authorities have to be able to fuel the basics.” Should Labour win the next election, it is unlikely it will ditch the schemes – many of the freeports, including Liverpool’s, are being established in collaboration with Labour-run local authorities that won bidding for funding from the Department for Housing, Communities and Local Government.

One official from Liverpool’s new special economic zone is quoted in the Cles report insisting the project will facilitate “a race to the top”. The city is attaching investment in the area to compliance with its Fair Employment Charter promoting trade union representation, guaranteed hours, living wages, diversity policies and strong health and safety practices. Devon County Council, which will operate Plymouth and South Devon Freeport along with two other local authorities and private-sector partners, will measure the project’s success by looking at improvements in reducing deprivation, economic inactivity and training the local workforce, rather than simply measuring gross value added or GDP growth.

The Celtic Freeport in South Wales, operated by Neath Port Talbot Council and Pembrokeshire County Council in conjunction with private-sector organisations, is singled out for particular praise. That project benefits from “the more enabling Welsh policy landscape”, as the devolved administrations within Wales enjoy significantly more powers than their English counterparts.

The Welsh government’s freeport bidding prospectus “refers specifically to the need for bidders to demonstrate how they would implement fair work, decarbonisation and prioritise the well-being of workers and communities”, says the report. The freeport board also includes permanent seats for trade union representatives. The sites are “located near areas of acute deprivation” and “the goal is that employment within [them] is primarily drawn from these communities”. To qualify for relief from business rates, employers operating in the ports will have to prove they offer what the prospectus describes as “fair working conditions”.

[See also: The freeport con]

With this set of strings attached to freeport investment, many might worry that local government stakeholders are mitigating against the policy’s original purpose: attracting private sector investment through a lax regulatory approach. “That was my initial initial impression,” Benstead says. But “what we’re hearing from the ground is a lot of companies are most attracted by tax benefits around business rates, which is, interestingly, locally administered”. Companies, it seems, are willing to provide high-quality employment while enjoying business rate relief. The reduced burden of import and export duties also contributes to the pull factor.

Future Freeports recommends that authorities use retained business rates from freeports to create a “skills pipeline” to ensure disadvantaged communities can take advantage of employment opportunities in new businesses. To this end, Liverpool City Region and the Celtic Freeport have earmarked funds from their sites for investment in skills teaching.

Cles also recommends that freeport boards can guard against “displacement” by making sure that the benefits of rate relief and other incentives are only given to new investors, as opposed to those who have simply shifted their capital from elsewhere (although the limited capacity of financially stretched local authorities to administer this kind of system is acknowledged). Voluntary, community and social enterprise organisations could also benefit from freeport incentives, Benstead adds, and special consideration could be given to cooperatively owned businesses.

Today, as Prime Minister, Sunak is overseeing the creation of the first twelve freeports to be established since the UK left the European Union. The locations, eight in England, two in Scotland and two in Wales, were announced in March 2021, when Sunak was still chancellor. The Office for Budget Responsibility has predicted that their tax exemptions will cost the Treasury £50m a year. Although there are different types of freeport, including eighty already registered within the EU, Sunak and other defenders of the policy have claimed that stringent European state aid rules for member states once prevented the government from offering the full range of incentives, subsidies and tax breaks that would make freeports truly effective. Leaving the EU, they claim, has allowed the UK to shake off the bureaucratic straitjacket and unleash private enterprise. If successful, more freeports may follow, and Cles’s research looks at projects at different stages of the journey.

But the establishment of special economic zones hasn’t been plain sailing on every site. In 2022 the Conservative Mayor of Tees Valley, Ben Houchen, often talked up as the embodiment of the post-Brexit realignment of working-class voters towards the Johnsonite Tory Party, told Spotlight that despite his “Red Tory” credentials, he “came up with and developed, with Rishi Sunak, the most free market policy that this government have yet come up with – freeports”. Since then, the Teesside Freeport has been mired in accusations of wrongdoing and corruption, with an independent review ordered into contracts awarded to a small group of property developers who had reportedly made political donations to Houchen.

“This is exactly why we need accountability,” says Benstead. Cles’s research recommends “community participation” in the projects to prevent opacity, with “mechanisms like participatory budgeting” and workers’ representation on boards. “We’re calling for local authorities to be more creative with how they design the governance models of the freeport,” he says. “It has got to be accountable to both workers and the local community, and that’s exactly the kind of model that we see being designed in Wales.”

“Local authorities are backed into a corner,” Benstead told Spotlight. And after thirteen years of tightening budgets it makes sense that they see hosting freeports as a potential route to regeneration, regardless of the flaws in the policy. But this doesn’t mean they have to embrace without question the “enclaves of market radicalism” described by Slobodian. This might not be the ideal model, but it’s about “finding the progressive cracks within the agenda”, Benstead says.

To read the full report click here.

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