Onward with the creation of Freeports
So it was music to our ears to hear the announcement in March’s budget that the Government will create eight new Freeports in England. Businesses are set to benefit from more generous tax reliefs together with wider government support. If the Government’s aspirations are to be realised there will be simplified custom procedures, more investment, trade and jobs in regions across the country that need it most together with benefits for the UK as a whole. Freeports are also intended to bring with them the opportunities to create innovative hubs for global trade.
As for the eight Freeports which have been successful in the Freeports bidding process, East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames, the journey continues if the governance arrangements can be agreed and a business case successfully completed with operations to begin from late 2021. Depending on the business case submission, the successful bidders will also be able to access £175m of seed capital funding.
The importance of good governance
We start with the governance arrangements. The Freeports Bidding Prospectus issued late last year did provide some guidance around the setting up of the Governance Body though getting the governance right is no easy feat. There are corporate entities out there which have experienced catastrophic damage with one of the factors attributable to the damage caused being because the governance was not strong enough.
The Prospectus didn’t require a formal Governance Body to be in place at the time that the Bidders were submitting their bids though there was certainly a request for proposals to be put forward for each bidder’s future Governance Body, picking up on the level of governance structure required, an appropriate decision making structure and the achievement of three core standards (an effective structure, personnel and function).
Great results are capable of being achieved where good governance principles and practices are implemented and hence the reason for their importance. If the governance isn’t as it should be, then numerous failings can result-so what are the considerations to be aware of and the pitfalls that should be avoided?
To name but a few, potential matters which should be considered include:
- How will the Governance Body be structured? Is a legal entity required so that it can hold assets? There will be a number of considerations which will need to be taken into account, e.g., around tax, degree of flexibility required, constraints around regulatory requirements and what may be more attractive for third party investors.
- The setting up of a Freeport is hugely ambitious and potentially complex which will bring with it risk. There needs to be a full appreciation of those risks, with these risks mitigated or planned for as far as reasonably practicable. The Prospectus states that the operator of the Freeport customs site is responsible for the control of movement of goods and the access of people in and out of the customs site. What happens if things don’t go to plan, e.g., there is some illicit activity? The Prospectus makes it clear that the operator of the Freeports customs site will be jointly and severally liable with a declarant for any import duty liability following a breach of any requirement of the Freeport operator’s authorisation for the keeping of goods in the Freeport customs site. This effectively opens up the operator to be sued along with others or individually for the whole sum due, underlining the importance of apportioning risk appropriately. An assessment needs to be carried out beforehand about how risks are addressed, apportionment of risk between the parties being of paramount importance.
- Relevant information will need to be maintained as well as being readily available. By way of example, the Governance Body will be required to maintain a record of all the businesses operating, or applying to operate, within the tax site which is still not yet fully scoped and defined. The record will need to be readily accessible by HMRC, the NCA, and Border Force operatives. It will also need to be kept up to date and contain information about the beneficial owner of the business. This will all take time and the costs involved in carrying out these tasks will not necessarily be insignificant. Clarity will be needed on who bears the brunt of these costs.
- There needs to be the relevant knowledge and expertise at board level, with the capability to challenge proposals. The board should be of sufficient size and not too large as to be unwieldy, with the business objectives not met. Training should be given, where needed.
- There needs to be clarity about roles and responsibilities, with conflicts of interest minimised and any legal requirements complied with. How and what engagement will there be with specific regulators?
- All elements of the governance arrangements need to be properly documented and communicated appropriately to the individuals concerned.
- Sufficient regard needs to be given to scrutiny and monitoring of the operations to ensure that the Freeport’s interests are safeguarded, with costs appropriately managed and performance not compromised. If performance falls below a certain standard, e.g., with a breakdown of governance and clear signs of mis-management then depending on the circumstances some or all aspects of the Freeports business may need to be run by someone else under some form of step-in rights.
Good governance will ultimately bring benefits reducing the potential concerns around a number of aspects including performance, financial, legal, warranties and safety which will be absolutely key. This in turn should hopefully provide additional comfort for any third party investment.
Effective planning through the business case
A successful business plan will need to be put in place in order to move forward and given the timescales which the Government has set for creating the Freeports, this will not be without its challenges.
So far, a limited amount of information has been made available on the Freeport’s Business Case itself. The outline business case will be required to be line with the HM Treasury Green Book Guidance which will need to be submitted to the Government for approval. Assuming all goes well, following the input of HMT, HRMC and MHCLG and other government departments, as appropriate, the business case will be approved.
Each business case essentially falls into five parts, i.e., Strategic, Economic, Commercial, Financial and Management, the initial focus tending to be on the strategic and economic cases, with the other cases potentially being developed later.
The business case should not be seen merely as a means to secure an approval and obtain funding. It should be used as a mechanism to decide how best to deliver the Freeport, setting realistic goals and achieving a successful outcome which is able to measured by measurable and quantifiable objectives-looking at where it is now, where it wants to be and how it is going to get there.
The Strategic Case addresses the case for change, demonstrating how and what is proposed provides a strategic fit with the Financial Case used to demonstrate the affordability and funding of the preferred option. The Economic Case will involve an analysis of the monetarised and non -monetarised benefits and costs which will need to be aligned with the Strategic case objectives. Mitigation of displacement of local economic activity away from deprived areas will be a consideration as well as how the tax measures will generate additional activity.
The Commercial Case reviews the commercial viability of the Freeport. This will inevitably involve looking at procurement strategy, i.e., noting the changes introduced by the Public Procurement (UK Exit) Regulations, the various requirements around subsidy control and the potential for a new subsidy control regime, risk allocation and key contractual arrangements. All of these aspects will play a key role in the Freeport delivery particularly noting some of the top Government evaluation priorities at bidding stage were around:
- demonstrating strong levels of private sector involvement and investment;
- a strong focus on regeneration (being a lead policy objective); harnessing ideas and investment from the private sector to deliver jobs, sustainable economic growth and regeneration in areas which needed it most.
Security will inevitably be a huge issue and one which a number of the de-selected bidders failed to provide an adequate answer to. Matters like this will not go away and need along with other aspects to be given proper consideration.
Government will want to know that robust security arrangements are in place to protect against illicit activities including money laundering, criminal activity and smuggling. Borders of any type can be difficult to police. How will these risks be managed? Could it be through intelligence led systems, e.g., through distributed ledgers or some other form of technology and/or by co-operating with law enforcement and security agents?
Risks around security, safety, worker’s rights, economic displacement, environment and other aspects will inevitably need to be considered, with potential solutions developed to manage or eliminate these issues and allocate risk appropriately.
The Management Case’s purpose is to put in place arrangements for the successful delivery of a project. A whole host of matters will inevitably be assessed when developing the management case including roles and responsibilities, stakeholder engagement, governance arrangements and the project plan for delivery. Who will be involved in the delivery of a project? Will it be the LEP and/or the private sector partner? Who will be controlling the risk? Who will be responsible for insuring against the insured risks? How will the uninsured risks be managed? All matters to be given due consideration.
Assuming Freeports can get their governance structures and business case right, this will inevitably be a couple of steps in the right direction though there is absolutely no doubt that there is an enormous amount of work to be done, with some big obstacles to be tackled to achieve a late 2021 launch for the Freeports.
Jackie Heeds – Infrastructure and Projects Partner at Freeths
Edward Farmer – Managing Director at UK Free Trade Zone Association
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