View from the Middle East and Africa: FTZ pitfalls to avoid

Free-trade zone (FTZ): for many, the concept seems like a magical cure for many economic problems, promising fast-track results. Attracting foreign investment, upgrading domestic technology, creating jobs, enhancing export rates and many other hopes and dreams are connected to the decision of setting up an FTZ. Iran is a perfect example of a host country that is trying to catch up on lost development from years of heavy sanctions by almost doubling the number of its FTZs and optimising the operations of existing ones, such as Kish Island.

But the challenges of setting up an FTZ are widely underestimated. Having the right location, an attractive business proposition, effective (maybe even digitalised) governance and a business-friendly and stable political situation are common requirements of investors. Furthermore, a strong governmental commitment to accept the 'free' aspects within FTZs makes a small but crucial difference within the countries in the Middle East and Africa region. Most importantly, host countries need to understand that setting up an FTZ is just the beginning of a long journey, with many challenges to come.

The United Arab Emirates, with Dubai as its flagship, has been very successful in creating some of the world’s most profitable and innovative FTZs. Being a pioneer in the area, the UAE is currently going through another development stage, which is a great example for FTZ-related challenges after the initial set-up phase: the implementation of VAT by January 2018.

Legally, all FTZ companies are promised 50 years of tax-free operation. Practically, however, many activities offered in the domestic free zones, especially in the service sector, are inter-related to the mainland. Less than three months away from the official implementation, there is no official statement of the impact or the requirements of the VAT law for the free-zone companies. This is causing a lot of confusion and uncertainty, and forcing many investors to partially move their activities to other countries.

Generally, a host country must be very careful about the incentives they offer. Changes should be considered on all levels, and once they are decided upon they should be carefully planned and communicated in a timely fashion. Nothing is more harmful in this context then broken promises and confusing changes.

Mazdak Rafaty is managing partner of Ludwar International Consultancy and SME adviser to the joint Emirati-German Chamber of Commerce. E-mail: m.rafaty@lic-consulting.com