Iran FTZ Expansion Plans Clouded by Suspicion

EghtesadOnline: Some government officials and parliamentarians are unequivocal about expanding free trade zones.

News ID: ۷۸۲۲۴۵

10 April 2018

Last week, Morteza Bank, the secretary of High Council of Free Zones, announced the government plans to, once again, push for a bill on the establishment of eight new FTZs in May.

The proposed zones are Incheh Borun in Golestan Province, Mehran FTZ in Ilam Province, Ardabil FTZ in Ardabil Province, Sistan FTZ in Sistan-Baluchestan Province, Baneh and Marivan in Kurdestan Province, Jask in Hormozgan Province, Bushehr FTZ in Bushehr Province and Qasr-e Shirin in Kermanshah Province as well 12 special economic zones.

According to economist Kamal At’hari, although the areas designated as free trade zones in Iran are larger than those of China, officials still seek to designate more special commercial and industrial areas for unloading, storing, handling, manufacturing, reconfiguring and reexporting goods under looser customs regulations without paying customs duty, Financial Tribune reported.

Job Creation Underperformance

These staunch advocates further their agenda on a couple of pretexts, such as “free trade zones help create more jobs”.

This is one of the recurrent justifications provided by pro-new FTZ establishment officials and lawmakers, while statistics show as few as 50,000 jobs have been added to the economy between 1994 and 2009 in Iranian FTZs.

According to the High Council of Free Zones, during the five Iranian years of March 2012-17, only 13,000, 19,000, 24,000, 19,000 and 20,000 jobs were created in the FTZs, the Persian daily Shargh reported.

This shows that such areas play no significant role in improving employment.

Rent-Seeking Opportunities

There will be an inevitable increase in the prices of houses and lands when an area is designated an FTZ. Lucky are those who know where and when a free trade zone will be established beforehand.

Information rent, an economic rent an agent derives from having information not provided to everyone, would deem purchases of houses and lands profitable for a select few.

On the other end of the line are the locals who are financially incapable of taking advantages of the changes and forced to move to the suburbs and outlying areas of their cities.

Tax Havens

Iranian free trade zones have also made tax evasion easier.

On Friday, Director General of Iran National Tax Administration Kamel Taqavi-Nejad called for the careful scrutiny of the effectiveness of FTZs in exports and production, as well as their impact on other economic sectors.

“As per the law of the country, businesses based in free trade zones are eligible for tax exemption for 20 years and that has given way to tax fraud by some companies,” he was quoted as saying by Mehr News Agency.

“INTA has recently traced and clawed back 7 trillion rials ($140 million) in unpaid tax from a tax-dodging company whose headquarters have been moved from the mainland to an FTZ. The administration has identified 3,000 shell companies that might be active in the FTZs.”

Elusive Goals

Promoting economic development, boosting investment and public income, creating jobs, regulating the market, becoming active in regional and global markets, as well as improving production and exports of industrial items were the objectives behind the establishment of free trade zones in the first place, as stated in the Law on Management of Free Commercial-Industrial Zones.

What goes on in the FTZs across the country, in actuality, does not achieve these objectives.

The total exports by FTZs in 2016-17 stood at less than $350 million. This is while exports by Vietnamese and Malaysian FTZs account for 40% and 80% of their total exports respectively.

Under the circumstances, not only imports exceed exports in Iranian FTZs but the zones also practically turn into rivals of mainland markets and harm local businesses.

At’hari declared that the existing FTZs are adequate for the next 10 years.

“Metropolises are the main venues of knowledge-based, inclusive economy and job creation. Universities, creative and skilled workforce are based in big cities. To boost knowledge economy, the government should invest in the development of infrastructures in big cities,” he said.

“I personally oppose the establishment of Jask in Hormozgan Province as a new free trade zone. This comes as Chabahar Free Trade Zone is not far from Jask. Have we achieved the full potential of Chabahar?  Investment diversification would result in the failure of both FTZs.”