Written Submission from UK Major Ports Group (FRP0012)

Written submission from UK Major Ports Group (FRP0012)

27th May 2020

Dear Mr MacNeil,

Evidence submission: UK Major Ports Group – Freeports

I write on behalf of the operators of the UK’s largest port operators as Chief Executive of their trade body the UK Major Ports Group (“UKMPG”). UKMPG represents nine of the UK’s top ten port operators who, via the 40 ports they run, handle three quarters of all the port volumes entering and leaving the UK and invest more than half a billion pounds each year in the UK’s ports and surrounding coastal areas. These ports include 13 of the largest 15 ports in the UK and the largest ports in England, Scotland and Northern Ireland. Some more information on UKMPG members is included in Appendix A to this Evidence Submission.

We have grouped our thoughts under the Themes set out by the Committee’s terms of reference for this inquiry.

General perspective on the Government’s freeport proposals

1. The UK Major Ports Group broadly supports the principle of freeport development in the UK. Done right freeports should be important in building stronger global gateways for trade and, through strengthening these gateways, boosting coastal communities all around the UK by acting as a catalyst for more investment, jobs and prosperity.

2. Our perspective is rooted in learning lessons from the positive impact that freeports, sometimes operated by UKMPG members, have had elsewhere in the world. But positive impact is not guaranteed. There are serious choices to be made and risks to be addressed.

3. With the UK leaving the EU, freeports have come back into focus. The UK has of course had the ability to establish freeports as an EU member- the UK had a total of seven freeports between 1984 and 2012 – and could indeed tweak duty rules today.

4. But the opportunity now before us is to take a step change approach that this country hasn’t done before, really harnessing the potential of a full package of measures including, but certainly not limited to, duty treatment and bottom-up support.

5. Looking at examples where freeports have been successful it is clear that long-term success depends on more than just adjusting tariffs. Although components of success need to be tailored to national and even local / sectoral need, we believe the following are important parts of a ‘toolbox’ that should be available to freeports in the UK:  Planning: Streamlined planning rules which set out upfront the criteria for development, so locations can capture investment opportunities quickly (as is the case with, for example, Local Development Orders – demonstaring to a degree that some potentially important mechanisms for implementing freeports or similar ‘port zones’ are already workable and in existence);  Connectivity: High capacity road, rail, energy and data links must be in place upfront, so businesses are ‘ready to trade’ straight away.

Registered in England No. 2787097 2

 Expedited import / export processes; Streamlined processes and provision of advice for approving the movement and storage of goods for import and export will help all businesses, particularly SMEs, trade with the world more.  Incentives: Benefits both in terms of funding such as grants and property tax benefits and accounting treatments such as capital allowances are common across all nations battling to secure inward investment.  Talent and innovation pipeline: Aligning local sources of talent and innovation (universities, further education colleges, incubators and accelerators etc.) with the freeport. Packaged with incentives for hiring and fostering local innovation, creates both a stronger proposition to inward investors and delivers more benefits to surrounding communities.

How freeports will align with the UK’s trade and investment priorities

6. The dual priorities for trade and investment are mutually reinforcing in terms of making freeports a success for the UK.

Trade 7. The UK’s ports sector is vital to the UK. 95% of the UK’s physical trade with the world arrives or departs the nation by sea1. As the UK’s predominant global gateways with the world major ports are crucial enablers of strategic supply chains for the UK – allowing our industries to export and bringing in the food and goods that we all depend on in our daily lives. For example, virtually all of the £101 billion of international trade by the UK’s automotive sector moves through our ports. Around half of the UK’s food and feed needs are imported via our ports.

8. Therefore, building on this foundation including through the development of freeports provides a strong base for supporting existing UK trade with the world and creating more capacity and capability to boost trade further. This supports job retention and creation not just at the freeport location but also throughout the UK.

9. At the freeport location itself Government at both national and local levels can also play a critical role in stimulating a ‘campus’ approach to a free zone location and the agglomeration scale and scope economies / benefits that come with it. These include provision of connectivity (transport, energy, digital) and supporting the alignment of local skills and innovation providers, supporting a virtuous circle of local supply chain development.

10. These would become particularly important – and therefore attractive to investors and businesses – if there was some degree of sector specific focus. That would combine with an ability to tailor the ‘tool box’ of freeports measures (see below within the Investment section) to the particular needs of a target sector. Availability of competitively priced energy might be a much more powerful incentive for some sectors than R&D tax credits for other sectors for example. Scale benefits could also benefit SMEs by, for example, creating a ready pool of talent but also local services such as export support and customs agents.

11. Its also important that freeport regulation is set so that it allows UK businesses who may not be located within the freeport zone or network to benefit. So for example UK component suppliers should be able to supply firms operating within the freeport without additional penalty.

1 UK Port Freight Statistics: 2016 (Revised), Department for Transport, 2017, page 3

Registered in England No. 2787097 3

Investment 12. It’s crucial that we build in the perspective of the potential inward investor and occupier of facilities within the freeport. Securing such investment is what will ultimately make freeports a success. UKMPG has done modelling work with property investment specialists CBRE to help understand the important levers for an attractive proposition to occupiers.

13. Attracting investment is a highly competitive area. Inevitably the financial proposition is an essential part of any proposition. So financial elements will have to form a key part of the toolbox identified above – requiring Government at national and local levels to potentially make short term trade-offs to secure longer term gain.

14. The financial proposition will need to be flexible enough to not only recognise different local needs. It will also need to be flexible enough to respond to the different cost bases of industries. This means that different financial policy levers – e.g. around energy costs – will have differing effects and some commonly touted levers for different industries such as business rates relief might have a low incentive effect for some potential occupiers. The ‘toolbox’ approach and the flexibility to deploy it is therefore essential.

15. To give a practical example of such a ‘tool box’, the graphic (left) sets out the scope of the offering to potential inward investors in a US freeport. Not all of these elements would form part of the proposition to an investor, it would be tailored to the specific investment case, and of course differences in taxation approaches means that it is not an immediate ‘copy and paste’ to the UK situation. But nevertheless, it is a useful and, most importantly, real world example.

The criteria for choosing freeports

16. Two of the Government’s headline criteria of “national hubs for global trade and investment across the UK” and “promote regeneration and job creation” are sensible. It is important that both of these criteria are reflected in the selected bids – a strong proposition as a trading hub gives the best chance of sustainable job creation both locally and nationally.

17. The Government’s third criteria, that selected freeports should “create hotbeds for innovation”, has caused a certain degree of confusion amongst potential bidders. Whilst we

Registered in England No. 2787097 4

welcome that innovation is regarded as a desirable characteristic. However, the description of what the Government is looking for is ambiguous. It shouldn’t be regarded as material a factor as the ‘trade hubs’ and ‘regeneration’ criteria.

18. Developing capable global gateways is not an overnight task and is one that requires hundreds of millions, if not billions, of pounds of investment. Therefore, rather than attempting to commit public funds to building from scratch we believe there is a more feasible and higher Value for Money / Benefit Cost Ratio approach through Government and public funds acting as incremental incentives. This would build on locations where there is potential but where the fundamental investment has already been made.

19. We support the approach of competitive bidding process. It is right that we use a robust process to gather and assess proposals. Many port operators, together with local stakeholders, are interested in submitting freeports proposals. For industry and potential investors, it is crucial that the process for becoming a freeport is fair, transparent and evidence based.

20. We disagree with the apparently arbitrary choice of 10 as a capped number of freeports. We believe that the selection should be steered by the number of truly compelling bids. If only 5 compelling bids are received, then the UK should have 5. If there are 15 great bits that truly deliver national hubs for trade and regeneration then why not have 15? The cap of 10 would become even more concerning if there was some form of attempt to ‘share out’ the 10 amongst UK nations / geographically and transport modes. That risks restricting potentially compelling bids in particular categories.

How freeports will contribute to economic regeneration

21. The UK ports sector already makes a significant contribution not just to the UK economy as a whole but also to coastal communities and regional economies which are often in need of economic and broader regeneration.

22. The most recent research2 estimates that the ports industry in the UK directly contributed £9.7bn of value to the UK economy, over half of the value contributed by the maritime sector as a whole. Around 115,000 people were directly employed by the ports sector in 2017, jobs which are 55% more productive than the UK average and often significantly better paid than local averages. And each direct job in the ports sector supports around 7 in supply chains.

23. The UK’s largest port operators collectively invest more than half a billion pounds in the UK each year. At around double the rate of depreciation, that’s a substantial and growing contribution to the UK’s infrastructure3. Through this investment they are key catalysts for jobs and investment in the UK’s coastal communities – regions which can too often suffer from high levels of economic and social hardship4. Coastal regions are also at risk of being amongst the hardest hit by the fallout from the COVID-19 crisis.5 The coastal / inland economic divide is an important one and must not be ignored.

2 “The economic contribution of the UK ports industry: A report for Maritime UK” – CEBR, September 2019 3 UKMPG analysis of major ports operators financial Report and Accounts. 4 For example, see “Living on the edge: Britain’s coastal communities”, September 2017 and “Falling off a cliff” August 2019, both by the Social Market Foundation, 5 For example, see “COVID-19 and our Towns” April 2020, The Centre for Towns

Registered in England No. 2787097 5

24. The catalytic effect of ports is not just in the ports themselves. It is also in the surrounding hinterlands as ports develop their broader estates and local land for productive use – logistics parks, fulfilment centres and manufacturing facilities. The wider infrastructure development – such as road and rail connectivity – made to support port development can also open up a range of more general economic and business activity for coastal communities. Each pound spent on a road scheme connecting a port can add more than four pounds of value for the wider local economy through improving conditions for business and tourism6.

25. As highlighted in our response to theme 5 below, coastal communities all around the UK would benefit substantially from regeneration activity, not just a limited number of freeports locations. Freeports have the potential to make a ‘step change’ difference to creating and / or defending in jobs in some locations and that is clearly very important for these locations. But freeports shouldn’t be seen as a binary choice. Instead they should be seen as one element of a wider ‘levelling up’ strategy. There are a number of measures (such planning reform and connectivity) which could and should be pursued more widely, giving a stepped range of regeneration tools for coastal communities rather than a cliff edge between freeport locations and the rest.

Potential negative impacts of freeports, including how these could be mitigated.

26. We are aware of three broad groups of concerns of potential negative impacts from freeports. We outline these concerns below as we understand them and suggest some potential mitigations.

Attack on standards 27. Critics of freeports proposals have raised the prospect of a them being opportunities to trash standards and become hotbeds of illegality. These might be environmental standards, employment standards and general questions of legal conduct.

28. It is certainly the position of the UK’s major port operators that ports – whether ‘free’ or otherwise – should adhere to high standards including in areas such as environmental protection and employment practices. We expect and would support that the same or comparable mechanisms in these kinds of areas would apply in freeports. Where there are adjusted regimes the adjustments should be around the implementation of measures not the levels of standards.

29. The UKMPG would fully support oversight of freeports by the appropriate authorities to ensure compliance and legality. This is true today in approved situations such as Bonded warehousing or Temporary Storage where Government and investigation / enforcement agencies have a clear and important role. We would also support international standards such as the OECD’s emerging “OECD Recommendation on Countering Illicit Trade”7 being followed in the UK, implementing important principles such as transparency, data access and pooling plus coordination and cooperation with local law enforcement agencies.

Displacing economic activity from elsewhere in the UK 30. UKMPG supports the principle that freeports should be a net benefit to the UK as a whole. Considerations of additionality should be built into the freeports process both at the

6 See for example the Heysham – M6 link road project https://heyshamlink.lancashire.gov.uk/background.aspx 7 “OECD Recommendation on Countering Illicit Trade: Enhancing Transparency in Free Trade Zones” October 2019

Registered in England No. 2787097 6

strategic level – location selection – and also possibly at the tactical level of approvals for specific developments within a freezone. Taking the example of the Local Development Order approach – although the approval process is streamlined, allowing opportunities for investment to be captured more readily and employment accelerated, it still allows for assessment against framework criteria.

31. There is also a very practical perspective. Relocating businesses is an expensive and burdensome and undertaking. It would require a substantial cost benefit to outweigh these costs. Therefore, a package that might be attractive to a ‘new’ investor might not be sufficiently attractive to a relocator.

‘Level playing field’ / competition between ports 32. Freeports are not a silver bullet for the risks of Brexit or ‘levelling up’ coastal communities. Particularly in terms of addressing the deprivation that exists all around the coast of the UK, freeports must be seen as one element of a wider ‘levelling up’ strategy. Indeed just focusing major advantages on a small number of locations and casting aside ‘the rest’ risks make a difficult situation worse for a lot of communities. Practically, there are a number of measures (such planning reform and connectivity) being discussed in the context of freeports that could and should have broader applicability for ports and coastal communities as a whole.

***

33. As an island nation ports have been key to the UK for millennia. At this historic and challenging time for the UK their importance has never been higher. The operators of the UK’s ports have the ambition to step up to the challenges and grow their contribution to the UK. Freeports, if implemented sensibly and as part of a broader strategy to aid regeneration of our coastal regions, could and should be an important part of realizing this ambition. We would be delighted to have the opportunity to discuss these matters further with you and your Committee.

Yours sincerely,

Tim Morris Chief Executive UK Major Ports Group

Registered in England No. 2787097 7

Appendix A: UK Major Ports Group Members

Registered in England No. 2787097