Exploring the Advantages of Free Trade Zones #26

Exploring the Advantages of Free Trade Zones #26

Historically, Free Trade Zones were confined to manufacturing and warehousing, but in recent years they’ve also been housing office operations, liked the shared service centres we were talking about in an earlier episode of Grow through International Expansion.

Where they exist, Free Trade Zones bring some obvious advantages to businesses setting up in another country. To start with, the “Free” means free of taxes – essentially they are zones physically within one country that treat every economic activity within them like being in a duty free shop – there’s no tax as long as everything created or manufactured is then sold abroad in another country. Some countries also allow sales within the country, though they are usually restricted in some way, typically by proportion of turnover or for a limited number of years.

But there are other advantages to Free Trade Zones too, such as being co-located in the same campus or complex as other similar businesses. That can help a lot with shared resources such as meeting rooms and catering, and helps with recruiting suitable staff too.

When our host, Oliver Dowson, was in Uruguay a couple of years ago, he was introduced to the different types of Free Trade Zones in the country, and was really impressed. Uruguay is different to other South American countries in that it’s the only one with Free Trade Zones. It’s a small country that’s used FTZs and leveraged its position and economic strength to become an attractive hub location for doing business all over Latin America.

On a recent return visit, Oliver took advantage of being there to revisit four very different Free Trade Zones. For this Grow through International Expansion podcast, he talked to the directors of each of them about the opportunities they offer and the differences between them.

The FTZs featured in this podcast are

Aguada Park – Director Francisco Ravecca – www.aguadapark.com
Zonamerica – Director Leandro Bonilla – www.zonamerica.com
World Trade Centre – Director Ignacio Del – www.wtc.uy/wtc/
Parque de las Ciencias (Science Park) –General Manager Enrique Pueblo – www.zonafrancapdlc.com

LISTEN NOW

TRANSCRIPT

This is not a verbatim transcript – it has been slightly edited to improve readability.

OLIVER: Historically free trade zones were confined to manufacturing and warehousing but in recent years they’ve also been housing office operations like the shared service centers that we talked about in an earlier episode of Grow through International Expansion. Where they exist, free trade zones bring some obvious advantages to businesses setting up in another country. To start with, the “free” means free of taxes. Essentially they’re zones that are physically within one country but that treat every economic activity within them like being in a duty free shop. There’s no tax, as long as everything is created or manufactured there and then sold abroad in another country.

Some countries do also allow sales within the country, but they’re usually restricted in some way typically by proportion of turnover or for a limited number of years. But there are other advantages to free trade zones too, such as being co-located in the same campus or complex as other similar businesses. That can help a lot with shared resources, such as meeting rooms and catering. It helps with recruiting suitable staff too.

When I was in Uruguay a couple of years ago, I was introduced to the different types of free trade zones in the country. I was really impressed. Uruguay is a bit different to other South American countries in that it’s the only one with free trade zones. It’s a small country that’s used free trade zones to leverage its position and economic strength.

It’s become an attractive hub location for doing business all over Latin America. I went back again recently, and took advantage of being there to revisit four very different free trade zones for this Grow through International Expansion podcast. I talked to the Directors of each of them about the opportunities they offer, and the differences between them. Let’s start at Aguada Park, in Montevideo city itself, near the port. It’s essentially a collection of office towers. Its director is Francisco Ravecca.

OLIVER: Aguada Park is one of several free trade zones in Montevideo. Can you tell us something more about this and about yourself?

FRANCISCO: Yes. Well Aguada Park is a Services Free Trade Zone, which differentiates us from a traditional free trade zone. Considering that, we do not have any logistics or manufacturing at Aguada Park. It’s all services, and by services I mean we are mostly focused on business process outsourcing shared services, contact centres etc.

We have four groups of clients. One group would be mostly related to those types of services that I was mentioning, like BPO shared services, contact centres and software development. Another group is related to financial services. We have banks that have their back office operations for their offshore banks here. We have private bankers providing services to the world. And, since a recent change in Uruguay’s free trade zone law, now they can also provide services in Uruguay.

OLIVER: That’s a big change since the last time I was here.

FRANCISCO: Yes. Let me finish with the four groups, and then we can get into that. In the third group would be professional services. We have law firms, accounting firms, consulting firms, architects, engineers, all providing services to their clients around the world. The fourth group is related to trade and commerce, for example commodities traders. We also have apparel design companies that are designing clothes here at Aguada Park. They’re sending those designs to India or China to get the clothes produced there, and exporting them around the world to their customers.
OLIVER: Now, moving to the city outskirts and closer to the airport, we find a rather different free trade zone, a campus with a wider variety of businesses, ZonAmerica. It’s Director is Leandro Bonilla.

LEANDRO: ZonAmerica is the largest business and technology park in Uruguay. We have nearly 100 companies operating within our park, all tenants of our company. We provide what we call a one stop solution for all of these companies, where we have them set up their operations in their own way with our very nice campus atmosphere, and we do all the real estate development. We have a special free trade zone regime which gives the company tax advantages. We provide them also with connectivity, IT solutions and data centers and we even help the companies recruit the talent locally. It’s a one stop solution in order to have companies come into our country and use our platform. We have tenants which are operating regionally and some of them are operating globally.

OLIVER: It seems really large and it really is a park.

LEANDRO: It is – our campuses cover 92 hectares. We have urbanized almost seventy five percent of that and have constructed 30 buildings. We have different types of operations, so a part of the park mainly concentrating on logistics operations and distribution.

OLIVER: So like warehousing?

LEANDRO: That’s it, for the region, mainly for the Southern Cone of Latin America. Many companies receive their inventories here and then distribute to the south from Argentina to Paraguay here. The attraction is basically the fact this is a free trade zone. Here it is tax free, so companies can then defer the payment of taxes until they have finally done the deal in each country.
It’s a way of centralizing inventories instead of having a lot of domestic inventories in each one of the Latin American countries, and you have no restrictions in trade regarding time limits for the products coming into the free zone, so you can add value to them. You can assemble different products. For example, we have a Nano Satellite producer. It’s a company called Satelogic. They assemble the satellites here and then launch them in China. They export their satellites from here to China and then send them into space to do photography. That’s a very interesting case, but then we also have a lot of companies in the services sector. So, we have shared services centers of international or multinational companies, providing services to their own branches all around Latin America. We have software companies, factories, IT outsourcing companies and financial services companies. So, our, let’s say the industries are very diverse within Zonamerica.

OLIVER: Back in the city, the World Trade Center is one of the most impressive locations. It’s an interesting hybrid, in that there are separate buildings where some are free trade zones and others are conventional local businesses. Its director is Ignacio Del. Ignacio, please do tell us about the World Trade Center and what’s special about it.

IGNACIO: First of all, I want to highlight that for all the foreigners that came to Uruguay, at the beginning, the first feeling is surprise regarding the World Trade Center. Here at the World Trade center, we have two different businesses. First of all, the surprise is that in Uruguay and Montevideo we have a triple-A buildings that are world class. That’s the main and the first surprise that we have good buildings with great quality in order to put the operation of the offices for the companies.

We have two businesses here, first of all we have the World Trade Center, Montevideo. That is the common building and the common franchise all over the world with more than 300 franchises. We have four buildings with more than 300 companies, and on the other hand we have now one building that’s a free zone in the middle of the city. This is another innovation, and basically this free zone is a building that’s a pure services free zone. There are more than 140 companies providing services all over the world from Uruguay, and now we’re building the Free Zone Tower 2 that will be finished in 2020.

OLIVER: Can you name drop some of the companies that are in the free trade zone?

IGNACIO: Yes, in fact we have four segments. Consultancy and professional services account for around 40% of the companies that we have here, and in that you have big companies like Deloitte and PwC. The second segment is finance and finance advisors where we have companies from all over the world. The third segment technology and we have developers and also a lot of companies that give customer services for Oracle and SAP. The fourth segment is Agri business and trading. We have three of the most important commodities traders like COFCO, Louis Dreyfus and also Bunge. In terms of companies that having their shared service center, we also have Willis Towers Watson. That started with six people and now they have near 100, they started small, because as you said, we have an awareness issue and a lot of people don’t know anything about Uruguay.

OLIVER: Finally let’s head over to the Parque de las Ciencias, literally the Science Park, again just outside the city. Their general manager is Enrique Pueblo.

ENRIQUE: As you know this is a free trade zone here in Uruguay, it works under the free trade zone legal regime that we have here from 1987. Uruguay was the first Latin American country to develop free zones, that comes from 1923 but really in 1987 with the private free zone legal regime is when the regime was deployed, and Parque de Las Ciencias is one of the consequences of that regime. It’s a 55 hectare park where we focus a lot of our efforts in infrastructure. So, I would say that our main claim for the park is that we have enough infrastructure here – world class infrastructure to develop any kind of project, from a very simple commercial office to a highly complex industrial project. So, where everything here is developed and in place to be able to handle that kind of highly complex industrial companies like Pharma. Here was a company looking for a site to develop a manufacturing plant, a really big, high technology one. We provide every service they need for that plant including fire extinguishing system, water effluent treatment plant, communication and data, everything they need basically.

So that’s what we started with the construction of the park in 2009. We negotiated the first building by the end of 2011, and nowadays we have around 52 companies working here. Some very big, some very small, a little bit of everything. The idea here is that we are not only focused in life sciences, we also have other activities to complement life sciences projects, service providers etc. and also companies coming from very different sectors like commercial and trading services. So, it’s not an exclusively life science related park. Yes, it’s oriented towards life sciences, high end technology, higher value activities and we want to keep very focused on that – our idea is that the park is always attractive for that kind of activities

OLIVER: As you’ve heard a lot of the businesses in the free trade zones are office-based, focused on delivering services to customers across Latin America and in some cases beyond. One thing that struck me was that in the past the main business criteria for which country to locate this type of operation was cost – basically the cheaper the better. But while Uruguay has lower costs than, say, the United States or Western Europe, it’s not a cheap country. Here’s Ignacio Del again.

IGNACIO: I think that the world has changed. Actually we are becoming global and we have no boundaries and no frontiers, and the companies nowadays have the opportunity to see the whole world as their own countries, so they put their operations in the most efficient location for each activity. For sure they know that maybe in India they can provide a lot of people because they are low cost. If the driver is the price, for sure they will have very low prices because the offering is huge in India they won’t have the same price as here in Uruguay. So, from a company perspective, we want to position Uruguay with high value-added activities. We think that companies are tending to that, and we want to have a good value proposition in order to fulfill that.

OLIVER: Another advantage that was repeated to me everywhere I went was the accessibility to Latin markets. Like when I was talking to Leandro Bonilla.

OLIVER: Montevideo is not a very big place anyway, but you do have the advantage of being practically right next to the airport.

LEANDRO: Yes. And that’s also key for many of our tenants. Since they are using our platform as a regional base there are many people here traveling all the time around Brazil, Argentina, Chile and all of Latin America. And so yes, it is very easy to move in and out of the country by having the office very close to the airport, and also very close to some of the nicest residential areas, just 15 minutes away. In the near future we are also planning to have our own residential area surrounding ZonAmerica. We have a project called Jacksonville, where we will also offer residential solutions for the people working here.

OLIVER: All the free trade zones recognize the need to make sure that quality staff can get easily to and from work and the importance of that for staff retention. Languages are another key consideration. Uruguay is a Spanish speaking country and it has a good education system. That means that most school leavers speak really good English, but that’s not all. Here’s Francisco Ravecca again.

OLIVER: One thing I was interested in before when I came here was that you can actually have a reasonable number of people who speak Portuguese. It’s possible to actually get employees with good Portuguese. I think that probably makes this the only Spanish speaking country in South America where that’s possible.

FRANCISCO: Yes, you get good quality Portuguese. Considering that we have a very extended dry border with Brazil. All these young people that grew up near the border, when it comes to going to university, they usually come to Montevideo. So we have Portuguese speaking young people that are at the university here and that gives you access to Portuguese skills.

OLIVER: Which is important if you want to cover the whole of Latin America because that’s roughly half the population of a continent by itself.

There’s also an established infrastructure of service providers intended to make setting up an operation as trouble free as possible, as Enrique at Parque de las Ciencias was telling me.

ENRIQUE: You have those suppliers appropriate to your industry. Those suppliers who usually specialise in whatever you need, so you don’t need to explain things to them and you have a fast response. They specialise in the industry you’re into. So that’s one of our objectives, that the industries share a park where they all find and share those services they need. Everyone here is working under the tax benefit, so you should get cost benefit in the services you hire within the park. That’s why we have logistics operators. We have printing companies doing boxes for products. We have accountants doing auditing and lawyers doing patents and trademarks. We have a engineering firm from Argentina that develops pharma manufacturing sites and health related projects. So the idea is that the cluster becomes attractive and that the providers want to come into the park and be nearer to find final facts.

OLIVER: So in summary there is a lot on offer from the various free trade zones in Uruguay. I’ll let Francisco Ravecca wrap this up. Francisco, what else should people be looking for in Aguada Park?

FRANCISCO: Uruguay as you know is a very convenient location from which to provide services worldwide. We call ourselves a world apart, a global services platform from where our clients provide these types of services worldwide. Uruguay is a very educated country with no natural disasters, no racial issues and no ethnic issues.

It’s just a nice place to live. I grew up in the US, then I decided to come back here and raise my family here because I find it a very attractive place to live.

When people see Uruguay, they decide for Uruguay. The free trade zone regime is very convenient. All of our clients are provided services tax free. They pay no taxes created up to now or to be created in the future. The government stands very strongly behind this, because there are articles in the free trade zone law that provide the government’s commitment towards this.

OLIVER: That’s all for this podcast about free trade zones. I hope you found it interesting and enjoyable. If you’ve got comments or questions, be sure to send them to me. I and my colleagues at Grow through International Expansion will be glad to answer or pass them on to somebody else who can.

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