FTZs Gone Off Track

EghtesadOnline: The performance of Iran’s seven free economic zones, namely Kish, Qeshm, Chabahar, Aras, Anzali, Arvand and Maku, has recently gone under the magnifying glass.

News ID: ۷۷۳۲۲۹

16 January 2017

Both the Iranian Parliament and economic players criticized the policies and performance of these zones, as the government of President Hassan Rouhani sent a bill to Majlis to add seven more FTZs and special economic zones.

“An assessment of the performance of five of these zones that have been active for an average of 10 years shows exports from these regions have been three times less than imports,” the head of Majlis Special Economic Commission, Mohammad Reza Pour-Ebrahimi, was quoted as saying by the Persian economic monthly Ayandeh Negar.

Imports Prioritized Over Exports

FTZs were established in our country to increase production, create jobs and promote exports, Pour-Ebrahimi added.

Yet, at present, he said, goods are imported and foreign currencies flow out of these zones, according to Financial Tribune.

The lawmaker said part of the FTZs’ revenues in Iran is intertwined with their imports and as such, imports are prioritized over exports. This is while all incentives, including tax and business regulations, offered in these zones were aimed at increasing exports.

The reason why FTZs were created in the first place, according to the deputy head of Iran Chamber of Commerce, Industries, Mines and Agriculture, Pedram Soltani, was because of inconsistencies between trade regulations of different countries, which render foreign investments difficult and time-consuming.

These FTZs, he added, were established in areas with access to free waters, airports, roads and railroads, or in places where these facilities could be provided as soon as possible.

More often than not, these zones were located close to local and international markets and where local companies would not face problems in finding skilled workforce.

“Then they eased regulations in those areas in a way that made investments, company registrations and money transfer easier. FTZs were created to attract foreign investments,” he said.

Soltani said countries that created the first FTZs soon tried to eliminate the economic chasm between the mainland and these zones, and extended these facilities to other parts as is evident today in developed countries.

Import Hubs

In Iran, most of these precepts were ignored.

“The initial approach in choosing the first three zones was not very flawed. Specifically, Kish, Qeshm and Chabahar were located in suitable areas with the exception that even these zones did not have all the required facilities. For example, there wasn’t an easy access to proper workforce in Chabahar and adequate transportation infrastructure is still lacking there,” he said.

Soltani noted that zones added later to the list were mostly focused on conducting economic interactions with local markets or a single country. Maku Free zone, for instance, has its eyes on Azerbaijan and Armenia, and Arvand Free Zone focuses on the Iraqi market.

“This is while FTZs must provide foreign investors with access to not only local but the international markets as well. Yet, instead of increasing foreign investments, the easing of regulations in these areas encouraged trade and gave a boost to imports. Goods were imported at low prices and sold in the mainland,” he said.

As a result, the official said domestic traders, instead of foreign investors, thronged the FTZs.

“They constructed shopping centers whereas production units were to be built. In the midst of this, our relations with the world deteriorated, because of the western sanctions imposed over Iran’s nuclear program, which resulted in fewer foreign investors wanting to do business in Iran,” he said.

“The government didn’t provide the infrastructure for these areas and somehow made them autonomous in that they were told to sell land and earn money to build airports and hotels. This was a big mistake, which changed the outlook of FTZ officials from one focused on expansion and development to one centered on trade.”

Since the infrastructure was not provided, Soltani believes, production and exports could not be easily carried out.

“Production and export expenses in FTZs are higher [than in the mainland].”

Repeating Mistakes

Soltani said the government saw how the FTZs were going down the wrong path, yet instead of making reforms and redirecting the business culture in the free trade zones to the one practiced elsewhere in the world, the government is making the same mistake again.

“In my opinion, the locations proposted for FTZs in the government bill are not suitable. In the bill, it is stipulated that each suggested zone will interact with which country. This is wrong,” he said.

“A foreign investor is not prepared to invest in these areas for the sake of one country and those being our low-income neighbors, too!”

The solution is to concentrate on the free zones in Kish, Qeshm and Chabahar, he concludes, and provide them with the needed infrastructure as soon as possible.

“Now that the Joint Comprehensive Plan of Action [nuclear deal] is in effect and sanctions have been removed, the best opportunity for attracting foreign investment lies ahead of us,” he said.