Home Brand Voice Free Zones in Lebanon… More than a need… A necessity

Free Zones in Lebanon… More than a need… A necessity

An analytical study of the free zones and their role in achieving urban development

by Firas El Husseini

Most countries in the world seek to attract investments as a dynamic driver of their economies. The establishment of free zones is one of the factors that countries, especially developing countries, resort to in order to attract and encourage foreign and national investments, due to the facilities and privileges offered by these areas such as tax and customs incentives and relatively cheap labor that enables investing companies to increase competitiveness and thus achieving a higher ROI (return on investment). The increase in the number of free zones in various countries of the world is one of the phenomena that caught the attention of researchers and specialized economic scholars to look for the motives and effects of these areas and the possibility of economic progress for the country that established them.

In the case of Lebanon, with the deteriorating economic situation that the country has never witnessed before in its history, the need is crucial for elements enabling the economy to restructure itself from within, instead of banking on the international community and entities to come up with a plan of action for the Lebanese to implement; with an appropriate vision and the decision taken, the country can regain its previous status as the Switzerland of the East.

A flashback on Free Zones

Since the time when the concept of free zones emerged, it was intended to attract part of the volume of international trade. Historically, the idea of ​​free zones dates back to about two thousand years ago, since the era of the Roman Empire. It was the first region in the Aegean Sea, where the free Delos were known islands that applied the idea of ​​re-shipment, storage and re-export of goods crossing the borders of the empire.

The countries located in the Mediterranean basin depended on commercial activity using the system of free zones in the Middle Ages, and with the emergence of colonies, European countries established small areas for them in cities with ports to facilitate the movement of trade between Europe and its colonies. Examples of the free zones that were established in that period are the Gibraltar region 1704, Singapore 1819 and Hong Kong 1842. These regions practiced re-export activities, providing shipping and establishing special warehouses for that. With the second half of the 19th century and the beginning of the 20th century, the idea of ​​free ports began to grow rapidly in Europe, and after the Second World War, when international trade began to grow again at a rapid pace in important strategic locations on the international trade lines, and the predominant use of free zones at this time was in the form of storage and re-export centers.

One of the successful examples of free zones during this period is the Colon region in Panama and in the late fifties and early sixties a new form of commercial free zones began to emerge that does not depend on commercial activity only, but depends on export industries, that is, it is part of the attraction planning for the international investment flows to industrial investment in the host country.

“Free Zones are responsible for exports worth at least 3,500 billion a year, equivalent to around 20 percent of global trade in goods”

The Shannon free zone in 1959 began to change the prevailing pattern of commercial free zones in the world from commercial activity to industrial activity, as it focused on establishing industrial projects that could absorb large numbers of workers and focused on the country’s exports to the outside world. During the sixties and the beginning of the seventies, several countries began to endorse the idea of ​​establishing industrial export zones in order to create an advanced export sector in those areas. Examples of the free zones that the Philippines and Bataan established in this period are: Bataan Malaysia, as well as Bayan Lepas and Japan Masan. Some countries have established free zones to serve both goals at the same time, to be free commercial and industrial zones, like the Egyptian free zones. Free zones have developed over time and the nature of their work has evolved. Export free zones for “exports” represent at the present time the prevailing pattern of free zones. According to the Kiel institute for the world economy, there are more than 5,000 Special Economic Zones worldwide, and the trend is rising, while the OECD (The Organisation for Economic Co-operation and Development) states that the so-called Free Zones are responsible for exports worth at least 3,500 billion a year, equivalent to around 20 percent of global trade in goods. 

The concept of Free Zones by definition

Considering the various legislations regulating the work in free zones around the world, we find that they did not set a specific definition of a free zone, but rather set a specification for its boundaries or for the customs’ procedures and regulations under which the system works within such areas, and some have designated the fields of activity that can be practiced within its boundaries. As the definitions varied according to the different “political, social and economic” goals in each country, those zones have developed along with the development of the nature of activities therein. They are a form of national and foreign investment; and from the customs’ viewpoint, they are considered an extension of the outside, but they are subject to national sovereignty from the political point of view.

Some define the free zone in a simplified definition as “the part of the state’s territory in which commercial, industrial and current operations are allowed in between countries free from customs, import and export restrictions and cash, hence the name free zone”, and it is “the closed space under guard where goods are stored, whether they are that space in a sea or airport, inland or on the coast, where goods of foreign origin are received with the intention of re-export, display, or the introduction of some additional operations therein.

“Direct job positions were estimated at 26,000 jobs in Jbeil”

The concept of Free Zones by objectives 

By establishing free zones in their territories, the host countries aim to achieve one or more of the following objectives:

1- Establishing industrial productive projects whose main objective is export.

2- Increasing the country’s foreign exchange earnings.

3- Establishing productive projects that meet the needs of local consumption instead of imports for both consumer and producer of goods.

4- Attracting foreign capital, which brings with it modern technologies in production and management.

5- Contribute to the revitalization of the internal and external trade movement.

6- Reducing the problem of population pressure in some large cities.

7- Reconstruction and development of some regions or increasing the urban growth of some relatively backward regions in order to find a kind of social and economic balance between them.

8- Finding and creating new employment opportunities, raising the level of technical and administrative skills, including modern technical knowledge and advanced technology developed by the free zone projects, and reducing the problem of unemployment.

9 – Attracting backward integration projects and creating forward linkages with the two sectors of the local economy, industrial and commercial.

10- Increasing the national income and redistributing it, increasing the net capital formation and bridging the gap between saving and investment.

11- Finding a productive industry that is a model for the local industry that is trying to join the foreign market.

12- Creating new knowledge that is fused with the skill of national institutions, i.e. management methods, financial techniques and marketing, all of this in order to improve the economic entity… 

In general, governments aim to establish free zones for economic development, and achieving these goals depends on the ability of the regions to bring some institutions onboard, on the quality of the polarized institutions and the nature of the activities they practice, and this in turn depends on the guarantees, facilities and incentives offered by those zones.

Factors controlling the success of Free Zones

The success of the free zones in attracting and encouraging foreign investments and achieving the desired goals and positive results on the economies of developing countries is associated to several basic factors, the most important of which are:

1- Carrying out preliminary studies before establishing free zones, including:

a.  Detecting potential opportunities to establish free zones in several districts;

b. Inspecting economic resources.

c. Studying global markets to find out the most important investment opportunities that can be promoted.

2- Choosing the locations of the free zones and planning them well in terms of:

a. Communication services.

b. Roads and mode of transportation.

c. Securing infrastructure.

d. The environmental and topographical suitability of the site with the type of activities intended.

e. Determining the appropriate size of the free zone, taking into account future expansions.

3- Political and economic stability and appropriate investment climate:

The most prominent obstacles to attracting investments in any country are the existence of disputes, internal disturbances, labor strikes, continuous change of governments, wars, and permanent change of economic policies related to investment activity, as all of this leads to negative effects on the general economic activity and the failure to attract foreign investments and capital escape.

4- Availability of labor at low cost.

5- Linking the objectives of the licensed projects to the general objectives of the government.

6- The administrative efficiency of the management of free zones: creating the conditions for the establishment of projects, simplifying the procedures, providing the necessary services, and facilitating the trade of projects with various authorities.

7- Benefits and incentives granted: 

a. Material incentives

b. Material incentives, including customs incentives

c. Tax exemption incentives

d. Other incentives, such as the none-restrictions on dealing in foreign exchange or money transfers and profits.

Byblos and the Beqaa Valley: Two locations… Two Hubbs

Establishing two free zones, one in Byblos (Jbeil) and another in the Beqaa Valley is one of the key measures if one can foresee the opportunities in these two locations. 

Mostly, the expected positive effects if such a project takes place can be summarized in the following points:

1- Employment: direct job opportunities can be created through companies and institutions investing within the region and indirectly, due to the backend links with the national economy. Direct job positions were estimated at 26,000 jobs in Jbeil (20% of 130K inhabitants).

2- Increasing the inflow of foreign currencies, the source of which is the wages paid to workers.

3- The rent value of buildings, land, electricity, gas and communications.

4- Importing raw materials, equipment and all projects’ needs from the local markets, pre-determined at a certain rate (most of the countries adopt the 20% rate).

5- Integrating the production of national institutions with the production of local institutions.

6- The development and sustainability of services.

7- Contributing to the improvement and development of training in vocational training centers and scientific centers.

8- Developing the areas surrounding the free zones and improving the yield of local energies.

To conclude, despite the darkness seen in the current situation in Lebanon, a lot can be done to alleviate this dark cloud from above the country, with a little vision and a lot of willingness. It is true that this project is seen to be implemented in the Byblos and Beqaa regions due to the adequacy of these locations, and it can contribute to achieving the goals of social and economic development provided that these areas should be included in the priorities of the economic recovery program, and a lot of opportunities can be found on the other sides of the country; another opportunity with another vision.

Firas El Husseini

Lawyer, holding a Public Private Partnership & infrastructure degree from Kennedy School of Government, Harvard; Mini MBA in Petroleum Industry Dynamics from Euromoney. With expertise in infrastructure and Oil & Gas contracts and other areas of practice.

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