Introduction
Free zones are considered by law to exist outside the 'customs territory'1 such that national laws governing production, trade, and other economic activities may be entirely or partially exempted. A free zone may be operated either by public or private sector actors or through a collaborative partnership between both sectors. In Nigeria, there are over forty (40) licensed free zones accommodating over five hundred (500) licensed 'free zone' enterprises carrying on diverse businesses within them.2
Free zones are broadly categorized into: (i) special economic zones; (ii) export processing zones; (iii) free trade zones; (iv) oil and gas zones; (v) border zones; (vi) industrial parks zones; (vii) logistics zones; (viii) information and communication technology (ICT) zones; and (ix) tourism zones.3
By offering exemptions or reductions in the application of national and/or economic regulations on key issues such as taxation, foreign currency transactions, import/export duty, free zones create an attractive environment for international businesses. The streamlined regulatory framework, coupled with infrastructural support and strategic location, positions free trade zones as catalysts for economic growth and foreign investment. This article will focus on free trade zones in Nigeria, exploring their contributions to attracting foreign investment as well as their impact on the nation's economic landscape while addressing key challenges such as land ownership, the juristic status of freezone, leakages tax-wise, state law overlaps and the availability of foreign currency that affect free zones in Nigeria.
Free Trade Zones in Nigeria
Free Trade Zones ("FTZs") are economic zones in a country that give special privileges in relation to trade and business policies to companies carrying on business within that zone. Each is a special area where local or foreign entities/enterprises can carry out economic activities such as manufacturing, importation and exportation of materials, goods, or services without being subject to the usual customs, tax, labour, and other regulations applicable in the country. The access to factors of production expectedly results in increased productivity and consequently increased exports and foreign exchange. The symbiotic relationship between the FTZs and the government broadly implies that while the FTZs are exempt from most municipal economic laws applicable within the country, (especially relating to taxes, custom duties and limitations on foreign currency transactions), the government benefits from the increased productivity and exports which boost economic growth.
The Nigerian Export Processing Zones Authority ("NEPZA") is the body saddled with the responsibility to regulate and oversee the operations and operability of FTZs.4 Although NEPZA has stated that there are about forty-two (42) FTZs, only twenty-five (25) are operational/active. These operational zones include: (a) Calabar Free Trade; (b) Kano Free Trade Zone; (c) Sebore Farms Export Processing Zone; (d) Lagos Free Trade Zone; (e) Newrest Airline Services & Logistics Free Zone; (f) ALSCON Export Processing Zone; (g) Snake Island Integrated Free Zone; (h) Ladol Free Trade Zone; (i) Lekki Free Trade Zone; (j) Ogun Guangdong Free Trade Zone; (k) Nigeria Aviation Handling Company ("NAHCO") Free Trade Zone; (l) Nigeria International Commerce City (Eko Atlantic); (m) Enugu Industrial Park Free Zone; (n) Dangote Industries Free Zone Development Company; (o) AHL Energy Free Trade Zone; (p) Bundu Free Zone; (q) Celplas Industries Free Zone; (r) Green Economic Zone; (s) Flour Mills of Nigeria Free Trade Zone (t) GC Export Industrial Park; (u) Hydropolis FTZ; (v) Alaro City Development Free Zone Company; (w) Quits Aviation Services; and (x) Nasco Town Free Trade Zone.
It is important to note that out of the twenty-five (25) operational FTZs in Nigeria, eighteen (18) of them are located in Lagos. While the concentration of FTZs in Lagos presents undeniable benefits in terms of investment opportunities and economic development, there must be strategies in place to promote balanced regional development and ensure that other regions of Nigeria also benefit from foreign direct investment. This may involve improving infrastructure outside of Lagos and implementing policies to foster inclusive growth nationwide. By addressing these challenges, Nigeria can harness the full potential of its FTZs to drive economic growth across the country.
In a typical FTZ, there is usually a main "Zone Company" which oversees operations within that free zone while the rest of the entities operating in the FTZs are known as Free Zone Enterprises ("FZEs"). Sometimes the FTZ is named after such Zone Company, such as the Flour Mills of Nigeria Free Trade Zone and the Nigeria Aviation Handling Company Free Trade Zone where the Zone companies are Flour Mills of Nigeria Plc and NAHCO respectively.
By law5, the activities/business that may be carried out within the FTZs include manufacturing goods for export, warehousing, freight forwarding and customs clearance, handling of duty-free goods, banking, stock exchange, insurance, reinsurance, and other financial services, import of goods for special services/exhibitions/publicity, international commercial arbitration services, activities relating to integrated zones, or other activities deemed appropriate by NEPZA.6 There are currently over five hundred (500) licensed FZEs operating within the FTZs across Nigeria, with objects ranging from manufacturing to oil and gas, pharmaceutical, rolling mills, food processing, warehousing, technology, logistics, petrochemicals etc.
NEPZA is vested with the authority to license, manage, and supervise free zones within Nigeria.7 NEPZA also has the authority to make regulations binding on FTZs in Nigeria.8 Further, NEPZA has established specific regulations governing operations and activities within specific FTZs like the Lekki Free Trade Regulations 2010 and the Lagos Free Trade Zone Regulations, 2016 and others. Additionally, NEPZA has introduced a regulation for the operation of FTZs in Nigeria which is known as the Investment Procedures, Regulations and Operational Guidelines for Free Zones in Nigeria, 2004 (the "Regulations"). It is essential to highlight that every FTZ also has its own specific regulations and operational guidelines.
The Oil and Gas Export Free Zone Act, 1996 ("OGEFZ Act") established the Oil and Gas Free Zone Authority ("OGFZA"), with the power to issue licences for oil and gas free trade zones while also assuming the responsibilities of managing and supervising the oil and gas FTZs in Nigeria. Nine (9) FTZs namely (i) Onne Oil & Gas Free Zone; (ii) Brass Oil & Gas City; (iii) Warri Oil & Gas Free Zone; (iv) Eko Support Free Zone; (v) Liberty Oil & Gas Free Zone; (vi) Notore Industrial City; (vii) BESTAF Maritime Industrial Oil & Gas Free Zone; (viii) Secured Bunkering Anchorage Oil & Gas Free Zone; and (ix) Orashi Special Energy Oil and Gas Free Zone, have been created under the OGEFZ Act. Additionally, OGFZA has established its guidelines for enterprises within the oil and gas free trade zones as contained in the Oil and Gas Export Free Zones Regulation 2019. The OGEFZ Act generally has similar provisions to the NEPZ Act. From the foregoing, one might wonder the rationale behind maintaining two regulatory regimes rather than consolidating them into a singular regulatory entity. It is pertinent to note that each regime is tailored to address the unique needs of its respective industry and leverages specialized expertise accordingly. While merging the regimes may simplify the regulatory processes and enhance operational efficiency, it may not adequately cater to sector-specific requirements and the additional economic considerations that support the distinction.
Regulatory Framework for FTZs in Nigeria
The major laws governing the operation of FTZs in Nigeria are the Nigerian Export Processing Zones Act, 1992 and the Oil and Gas Export Free Zone Act 1996 (for oil and gas). Other relevant legislations include:
- Investment Procedures, Regulations and Operational Guidelines for Free Zones in Nigeria 2004;
- Oil & Gas Free Zone Regulations, 2019 ("OGFZ Regulations"), the guidelines to regulate the operations in the oil and gas sector; and
- The CBN Guidelines for Banking Operations in the Free Zones in Nigeria, 2016, (the "CBN Guidelines").
Both the NEPZ Act and the OGFZ Act (both, the "Acts") provide that for an entity to operate a free zone in Nigeria, such entity would need to obtain a licence from the NEPZA or the Zone Management.9 A licence can only be granted to persons who have satisfied NEPZA or the Zone Management of a particular zone in line with the requirements.10
There are three significant licences that may be granted by NEPZA or the Zone Management (both NEPZA and the Zone Management are collectively referred to as the "Authorities") in respect of FTZs in Nigeria, namely:
- Free Zone Developers Licence: This type of licence is granted to either a public or private entity for the establishment, management, and operation of an FTZ in Nigeria under the supervision, monitoring, and regulation by the NEPZA. This license must be obtained by the applicant or its nominee responsible for the development of the FTZ after the President has made the final declaration. This is usually the type of licence that Zone Companies (earlier referenced) have.11
- Free Zone Enterprise Licence: This licence is granted for an enterprise to carry out an approved activity12 within a free zone.13
- Export Processing Factory/Export Processing Farm Licence: This licence is granted to an export-oriented manufacturing enterprise which has the capacity to export more than seventy per cent (75%) of its production.14 While an export processing license is specific to export-oriented manufacturing enterprises, enterprise licenses cover a broader range of activities.
There are certain requirements NEPZA or the Zone Management may consider in the grant of a licence to an entity. Generally, a licence is granted to an entity that has satisfied the Authorities that:
- the business activity/ies that the applicant proposes to carry out aligns with the permitted activities in that free zone;
- the proposed business activities to be carried out will bring value to and be consistent with, the development program for the free zone;
- the applicant commits to comply with the applicable laws including the Acts and regulations or other by-laws put in place from time to time;
- it has the requisite technical, managerial and financial capacity, experience and track record; and
- the sufficiency of the foreign direct investment proposed by the applicant.
Incentives for Operating in an FTZ
As mentioned earlier, there are numerous benefits and fiscal incentives for companies operating in FTZs. For instance, tax exemptions and tariff incentives are granted under the NEPZ Act the OGEFZA Act, the OGFZ Regulation, and the CBN Guidelines.
Companies operating within an FTZ are exempted from all federal, state and local government taxes, rates and levies.15 However, by a Federal Inland Revenue Service Circular issued on April 15, 2021, FTZs are now required to file income tax returns. In addition, companies operating in an FTZ are entitled to duty-free importation of raw materials, machinery and equipment required for business operations, including materials for the construction or repair of facilities within the free zone.16 This incentive significantly reduces the cost of establishing or operating manufacturing or processing companies. FTZs also offer simplified and expedited regulatory procedures. This includes quicker work permits and customs clearance, simplified business registration processes and minimal red tape. This reduces the administrative hassles and costs involved in setting up business operations outside free zones.
Companies operating in FTZs are also entitled to other incentives such as: (a) the repatriation of foreign capital investments in foreign currency at any time and with capital appreciation of the investment; (b) rent-free land at construction stage, thereafter, rent shall be payable;17 (c) waiver on all import or export licence requirements; (d) one hundred per cent (100%) foreign ownership of business; (e) waiver on all expatriate quota approvals; and (f) up to twenty five per cent (25%) of a company's production may be sold in the customs territory against a valid permit and on payment of appropriate duties.18 Also, the profits and dividends earned by foreign investors can be remitted/repatriated freely. The shareholders of the FZEs are however still subject to taxes on their personal income.
Another incentive offered to companies in an FTZ is the effective and expedited dispute resolution forum. Disputes between companies operating in the FTZ are settled by the NEPZA.19 NEPZA is also empowered to resolve any dispute arising between the various public sector organisations operating within the FTZ. In the event of a dispute between two companies operating in an FTZ or within the Zone Company and a company in the FTZ, either party may refer the matter to NEPZA for settlement and the decision of NEPZA will be communicated to both parties.20 Also, in the event of a dispute between the FTZ and any other Government Agency or Department in the Free Zone, the matter shall be referred to NEPZA by either party and NEPZA shall represent the FTZ in all negotiations and arbitration.21 The provisions of the Arbitration and Mediation Act, 2023 shall be applicable in this regard. This results in speedy resolution of disputes, as opposed to the traditional court. However, we do not have much data on the extent to which this incentive has been utilized/successful. In cases of litigation within the FTZ, the appropriate law in the customs territory will be applicable.22
Companies operating in an oil and gas FTZ are entitled to additional incentives such as: (a) unlimited export of any product or goods manufactured, assembled, or pre-packaged in the FTZ into the customs territory;23 (b) a seventy-five per cent (75%) duty rebate on raw materials processed in the oil and gas FTZ; and (c) definitive exemption from foreign exchange regulations.24
Banks operating in FTZs are not left out as they can move funds in and out of the FTZ on all eligible transactions and are also exempted from (i) withholding tax deductions on interests payable on deposits, (ii) royalties and dividends, (iii) corporate and capital gains taxes, (iv) value added taxes, (v) payment of duties on imports of furniture, office equipment and other facilities necessary for its operations, (vi) the payment of stamp duties on all documents.25
How FTZs Drive Investment
FTZs play a crucial role in attracting foreign direct investment ("FDI") into Nigeria. By providing a conducive business environment with fewer regulatory hurdles, FTZs have encouraged FDI in Nigeria. The array of incentives and tax benefits offered by FTZs significantly reduce the cost of doing business and make them an attractive destination for foreign investors looking to establish operations in Nigeria. Further, the regulatory framework in FTZs is designed to simplify bureaucratic processes and expedite administrative procedures. Thus, companies operating in an FTZ enjoy a more simplified and less expensive regulatory compliance burden.
Many FTZs in Nigeria are strategically located near airports, major ports, and other transportation hubs. This strategic location enables access to global markets, thereby facilitating international trade by making it easier to import and export goods.
In addition, most FTZs in Nigeria offer specialized infrastructure and services tailored to specific sectors and services. Such include technology parks, innovation centres or hubs, industrial parks, etc. These facilities provide investors with ready-to-use industrial spaces, research and development facilities, and access to advanced technology, thus fostering innovation and boosting productivity.
Currently, FTZs create over 30,000 jobs in Nigeria. In the three years between 2020 and the first quarter of 2023, approximately $400 million was recorded by NEPZA in FDI inflows alone.26 While over $100 million was recorded from international exports.27 As at 2021, the Oil and Gas Free Zones Authority attracted a total investment commitment of $15.97 billion.28
Challenges/Recommendations
Despite the numerous benefits of FTZs, there are challenges faced by companies operating in FTZs. Persisting barriers to trade have hindered Nigeria from deriving significant benefits from FTZs.29 A report by the World Bank highlights some of the challenges faced by businesses operating in economic zones in Nigeria. These include inadequate legal and institutional framework; inadequate infrastructure such as power supply, gas and roads; inadequate environmental framework; inadequate knowledge and experience in zone management and operational know-how; and lack of stability in government.30
The key legal challenges faced by companies operating in the FTZs include: (a) land ownership, (b) juristic status of free zones, (c) expropriation, (d) tax leakages, (e) overlapping state laws, and (f) limited availability of foreign currency. Within the FTZs, the land belongs to the Zones and companies within the FTZs are granted subleases. This means that the companies do not have a right of occupancy in respect of the land. In addition, as sublessees, the companies are liable to pay rent yearly, and the Zone Companies remain lessors, and can "eject" the companies from the lands in accordance with applicable law.
Further, the juristic status of companies operating within FTZs is still uncertain. It is not clear whether their status is equivalent to that of companies incorporated under the Companies and Allied Matters Act, 2020 (as amended) ("CAMA"). Also, these companies are not registered in the manner that the usual CAMA-registered companies are. Determining their legal status, especially in relation to the customs territory is important, for certainty in their dealings with other entities outside the FTZ.
Companies in FTZs face the risk of expropriation from Federal and State governments in Nigeria. See Zhongshan Fucheng Industrial Investment Co. Ltd v Federal Republic of Nigeria (No. 1:2022cv00170). The Ogun State Government had sought to remove Zhongfu (a subsidiary of Zhongshan) from the Ogun Guangdong Free Trade Zone ("OGFTZ") after Zhongfu had acquired rights from the Ogun State Government to develop a park within the OGFTZ, and after Zhongfu had carried out extensive work towards developing the park. Zhongshan instituted an investment claim against Nigeria under UNCITRAL arbitration rules and was awarded the sum of US$55 million by the arbitral tribunal.
Tax leakages also pose another challenge, as the tax exemptions that Nigeria offers to companies in FTZs are costly and may not be achieving the desired outcome. For example, many enterprises within the free zones are producing solely for the Nigerian market, whereas FTZs are designed to stimulate exports and USD earnings. Also, the tax regime of free zone enterprises is still quite unclear. By law, free zone enterprises are exempted from federal, state, and local government taxes and levies, the employees and "owners" of the enterprises are still subject to tax from the income of the free zone enterprises. Further, the companies in FTZs are still subject to pay withholding tax, value-added tax, and income tax on transactions within the customs territory.31
Conflicts between the laws of the federal and state governments further create confusion and legal uncertainties for businesses. It is important to harmonise the laws to avoid confusion and ensure a consistent regime for businesses in FTZs.
Companies operating in FTZs rely on foreign currency for imports, exports , and transactions. The dearth of foreign currency in Nigeria remains a significant challenge for companies in free zones, especially those heavily dependent on the importation of goods or services. This affects the liquidity of the companies operating in FTZs in Nigeria requiring companies to manage currency risks effectively for sustainable operations in free zones.
Other challenges faced by companies operating in the FTZ include a lack of coordination among stakeholders; inadequate access to finance; inadequate monitoring and evaluation mechanisms; and inadequate stakeholder engagement mechanisms. Also, some staff of the FTZs lack comprehensive knowledge of the free zone's operations and regulations.
In addressing these challenges, the Nigerian government should proactively promote free zones through international marketing and investment promotion strategies. This could be done through partnerships with emerging economies or developed countries with strong interest to invest in Nigeria. In addition, financing or credit enhancement schemes can attract investors and enable companies have access to funds.32 Poor infrastructure is also a major constraint for free zone businesses in Nigeria. By improving on infrastructure such as roads, power supply, and water supply, companies can reduce the operational cost of doing business and make the free zones more attractive. Banks and other financial institutions can also offer long-term loans at single-digit interest rates for capital-intensive projects in the free zones. Companies operating in FTZs will benefit from affordable long-term financing. FTZs can also issue infrastructure bonds for the development of their FTZs.33
In addition, we recommend that the zone authorities should implement regular trainings and educational programmes for the staff to enhance their understanding of the operations of the FTZs and its applicable laws.
Conclusion
Operating in an FTZ in Nigeria offers several incentives that make it an attractive option for investors. The tax benefits, forex and customs advantages, and other interesting incentives create a more favourable environment for companies to establish and flourish, in contrast to the customs territory. The FTZs in Nigeria have positioned the country as an attractive investment destination in Africa by providing an internationally competitive regulatory environment.
While FTZs hold immense potential, they also face certain debilitating challenges that need to be addressed for their optimal performance. The Nigerian government must address these issues to unlock the full potential of FTZs to drive industrialization in Nigeria. If properly developed and well-managed, FTZs have the potential to transform Nigeria's economy through continued job creation and economic diversification driven by sustainable FDI inflows.
Footnotes
1. Customs territory means the Federal Republic of Nigeria.
2. Nigeria Export Processing Authority "The Free Zones" (https://nepza.gov.ng/free-zones/) accessed August 30, 2023.
3 .Ibid.
4. Section 2(1) NEPZ Act.
5. Third Schedule, Nigerian Export Processing Zones Act 1992 ("NEPZ Act").
6. Ibid.
7. Section 4 NEPZ Act.
8. Section 10(4) NEPZ Act.
9. Part 1, Regulation 5 of the Regulations.
10. Part 4, Regulation 1 of the Regulations.
11. Part 4, Regulation 2 of the Regulations.
12. Approved Activities, under the NEPZ Act (Schedule 3) include manufacturing, import/export, trading and financial services.
13. Part 4, Section 2 of the Regulations.
14. Part 4, Section 2 of the Regulations.
15. Section 8 of the NEPZ Act (as amended); section 8 of OGFZ Act.
16. Section 12 of the NEPZ Act; section 12, OGFZ Act.
17. However, we note that in some FTZs, the companies pay a fee for the land lease/sublease.
18. Section 18 of the NEPZ Act; section 18 of OGFZ Act.
19. Section 4 of the NEPZ Act; section 5 of the OGFZ Act.
20. Part 2, Regulation 24(a) of the Regulations.
21. Part 2, Regulation 24(b) of the Regulations.
22. Part 2, Regulation 24(c) of the Regulations.
23. Section 18 of the OGFZ Act.
24. Section 3(1) of the NEPZ Act.
25. Paragraph 6 of the CBN Guidelines.
26. Anthony Otaru, 'NEPZA Attracts $364.6 million FDI Inflows in Four Years' (https://guardian.org/business-services/nepza-attracts-364-6-million-fdi-inflows-in-four-years/) Accessed on September 03, 2023.
27. Ibid
28. Mary Izuaka, 'Free Zone Authority Attracts 15.97bn Investment Commitment' ( https://www.premiumtimesng.com/business/613819-free-zone-authority-attracts-15-97b-investment-commitment-official.html) Accessed on September 4, 2023.
29. Godsgift Onyedinefu, 'Nigeria's Free Trade Zones Crawling 29 Years After' https://businessday.ng/business-economy/article/nigerias-free-trade-zones-crawling-29-years-after/?ssp=1&darkschemeovr=1&setlang=en-xl&safesearch=moderate Accessed on September 4, 2023.
30. World Bank Policy Note, (2012) 'An Overview of Six Economic Zones in Nigeria: Challenges and Opportunities' https://openknowledge.worldbank.org/server/api/corebitstreams/content Accessed on September 4, 2023
31. The Federal Inland Revenue Service's Guidelines for filing of Income Tax Returns by Approved Enterprises within the Export Processing and Free Trade Zones, 2021
32. Ibid.
33. The Lagos Free Zone Company recently issued a 17.5 billion 20-year series III Senior Guaranteed Fixed Rate Corporate infrastructure Bond, its third issuance under an upsized NGN61 Billion Bond Issuance Programme, for the development of the Lagos Free Zone.
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