Background

A free-trade zone (FTZ) is a class of special economic zones. It is defined by the Nigerian Export Processing Zone Authority as a geographically designated area deemed to be outside the customs territory within which national regulations to company registration, production, trade and other economic activities may not be applicable or partially applicable.[1]

The establishment of Free-Trade Zones (FTZs) in Nigeria has been a crucial step in accelerating the country’s industrialization. These zones are purposely incentivized to achieve multiple objectives; these include:

• Foreign Direct Investments (FDIs)

FTZs in Nigeria, such as Lekki and Calabar Free-Trade Zones, attract FDIs by offering accelerated and simplified company registering, tax exemptions, duty-free imports, as well as simplified administrative procedures, amongst others. These incentives reduce operational costs, making the investment climate appealing to foreign companies. FDIs bring capital, advanced technology, and managerial expertise, crucial for economic growth and modernization.[2]

• Domestic Direct Investments (DDIs)

FTZs encourage domestic businesses by providing a competitive environment with incentives like tax holidays and duty exemptions. Local companies benefit from reduced operational costs and enhanced profitability, allowing them to compete with international firms.

• Employment Generation

FTZs generate direct employment from businesses within the zones and indirect employment through supply chains and ancillary services. This helps reduce unemployment and improve living standards in surrounding communities.[3]

• Infrastructure Development

FTZs lead to significant infrastructure development, including roads, ports, power plants, and telecommunications networks. These improvements benefit both the FTZs and surrounding regions, enhancing economic development and connectivity.[4]

• Technology and Skill Transfer

FTZs facilitate the exchange of knowledge, technology, and skills between foreign investors and local businesses. This transfer builds local capacity, improves productivity, and fosters innovation. Exposure to advanced technologies and best practices helps Nigerian workers and companies enhance their skills and efficiency, contributing to long-term economic growth.[5]

Legal and Regulatory Framework

The primary legal instruments governing FTZs in Nigeria is the Nigeria Export Processing Zones Act of 1992 (NEPZ Act) and the Oil & Gas Free Zone Act (OGFZ Act).

The NEPZ Act establishes the Nigeria Export Processing Zones Authority (NEPZA), responsible for licensing, regulating, and monitoring the activities within FTZs. The regulatory framework is aimed at creating an investor-friendly environment by providing incentives and reducing bureaucratic hurdles.[6]

The OGFZ Act established the Oil & Gas Free Zone Authority (OGFZA), with the power to license oil and gas free trade zones. OGFZA also has guidelines as contained in the Oil & Gas Export Free Zones Regulation 2003.[7]

Key Provisions:

• Exemption from all federal, state, and local government taxes, rates, and levies.
• Duty-free importation of capital goods, machinery, components, spare parts, and raw materials.
• Permission to sell within the customs territory without an import license.

Regulations

• Investment Procedures, Regulations & Operational Guidelines for Free Zones in Nigeria (2004)
• Oil and Gas Free Zones Regulations (2003)

Fiscal Incentives for FTZs Companies

Tax Exemptions

The primary attraction for companies in FTZs is the comprehensive exemption from all Federal, State, local Government taxes and levies.

Compliance Costs

Companies doing business within the free-trade zones are not required to deal with multiple regulators as required by other companies.

Regulatory Exemptions

Free Zone Companies benefit from several regulatory exemptions, notably:

• Import and Export Licenses: Not required for goods entering or leaving the FTZs.
• Duty-Free Importation: Capital goods, machinery, components, and spare
• parts can be imported duty-free.
• Expatriate Quotas: Not required, allowing companies to employ foreign personnel without quota limitations.
• Simplified Custom Procedures: Streamlined customs procedures for goods moving in and out of the FTZs.

Additional Incentives

• 100% Foreign Ownership: FTZ companies can be fully foreign-owned.
• Long-Term Leases and Rent-Free Lands: Availability of long-term leases for land and facilities within the FTZs. Also, the enterprise enjoys a moratorium on land rent during the first six months of construction for government zones.
• Infrastructure: Provision of high-quality infrastructure and utilities to support business operations. This includes stable power supply and good road networks within the zone.
• Efficient Customs Processing: Reduced documentation and faster processing times for goods.
• Guarantees Against Expropriation: The Constitution of the Federal Republic of Nigeria and the Nigerian Investment Promotion Commission (NIPC) Act stops the Federal or State Government from acquiring any enterprise save for public purpose upon the payment of fair and adequate compensation.
• Dispute resolution. Each Zone usually incorporates dispute resolution guidelines within its policies to ensure speedy and efficient resolution of any dispute that may ensue within the zone. It should be noted that this does not prevent any free zone company from applying to a court of law or engaging in other dispute resolution mechanisms.

Trade Facilitation Policies

To enhance the efficiency of operations within FTZs, the Nigerian government has implemented several trade facilitation policies. These policies aim to simplify procedures, reduce delays, and improve the overall ease of doing business.[8]

Trade Facilitation Measures[9]:

Single Window System: Implementation of a single window system for trade that integrates all relevant agencies, thereby streamlining the clearance processes for imports and exports.

Electronic Documentation: Adoption of electronic documentation and customs processing to expedite transactions and reduce paperwork.

Infrastructure Development: Continuous investment in infrastructure within FTZs, including transportation networks, power supply, and telecommunications, to support seamless operations.

Legal Instruments: Legal Instruments like the NEPZ Act and other legislation that clearly exempt free zone companies from corporate taxes for operations conducted within the zone has been a key factor that has facilitated trade within the zones.

Bilateral and Multilateral Trade Agreements

Nigeria is a signatory to several bilateral and multilateral trade agreements that impact the operations of FTZs. These agreements are designed to enhance market access, reduce trade barriers, and promote investment.

Key Agreements:

African Continental Free Trade Agreement (AfCFTA): This agreement aims to create a single continental market for goods and services, allowing free movement of business persons and investments. FTZs in Nigeria can leverage AfCFTA to access a broader market.

Economic Community of West African States (ECOWAS): As a member of ECOWAS, Nigeria benefits from regional trade agreements that facilitate the free movement of goods, services, and people among member states.

Challenges and Recommendations

Despite the numerous incentives and supportive policies, FTZs in Nigeria face challenges such as bureaucratic inefficiencies, inadequate infrastructure, and regulatory inconsistencies. To address these challenges, the following recommendations are proposed:

• Streamlining Regulatory Procedures: Simplifying administrative processes and ensuring consistency in policy implementation to reduce bottlenecks.
• Enhancing Infrastructure: Investing in infrastructure development, including reliable power supply and efficient transportation networks, to support FTZ operations.
• Strengthening Institutional Capacity: Building the capacity of regulatory bodies like NEPZA to effectively manage and oversee FTZ activities.

Conclusion

The trade policies affecting FTZ operations in Nigeria are designed to create a favorable business environment by offering fiscal incentives, simplifying trade procedures, and enhancing market access through international agreements. However, continuous efforts are needed to address existing challenges and fully realize the potential of FTZs as catalysts for economic growth and industrialization in Nigeria.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

[1]https://nepza.gov.ng/freezones/#:~:text=A%20Free%20Zone%20is%20a,be%20applicable%20or%20partially%20applicable (Accessed on 10 July 2024)

[2] Martins Odeh & Golda Ukomadu (29th November, 2022) “Nigeria Free-Trade Zone @ 30: Milestones and Prospects for Inclusive Industrialization” Nigeria Free-Trade Zone @ 30: Milestones and Prospects for Inclusive Industrialization – NEPZA Accessed 9/07/2024

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Nigeria Export Processing Zones Act (1992) https://nepza.gov.ng/ Accessed 9/07/2024

[7] Oil & Gas Free Zones Act Oil & Gas Free Zones Authority – Nigeria (ogfza.gov.ng) Accessed 9/07/2024

[8] World Trade Organization (2021) – Trade Facilitation Agreement – Nigeria’s Category A, B, and C Commitments

[9] National Trade Facilitation Committee (Nigeria) (2021) – Trade Facilitation in Nigeria: Challenges and Prospects