How the UK is preparing for a free-ports boom

The government's intention to establish 10 free ports to stimulate economic activity presents opportunities for constructors eyeing this emerging market

The UK has now left the European Union. While still a source of bitter disagreement, there appears to be a degree of cross-party acceptance that, like it or loathe it, we must now do all we can to make the best of Brexit.

At the heart of arguments on both sides of the debate has been the future of the UK's ports. On the one hand, some commentators have speculated that if a rock-solid trade agreement is not reached, new customs checks could lead to paralysis; Kent, it has been suggested, could become one giant car park.

On the other hand, Brexiteers argue that leaving the EU will allow the UK to designate areas as free ports to encourage inward investment and potentially contribute to prime minister Boris Johnson's so-called 'levelling up' agenda. Free ports or zones are designated by the government as areas with little to no tax in order to encourage economic activity. While located geographically within a country, they essentially exist outside of its borders for tax purposes.

If free ports are created in the North, the proposition goes, the economic development gains could be huge.

So what are the likely scenarios post-transition period, and will they present opportunities for the UK construction industry?

According to Port of Tilbury commercial director Peter Ward, the uncertainty around the terms of the trade deal with the EU has left UK ports in a state of limbo. "In the short term, Brexit uncertainty is holding back the ports business and limiting the ability to plan and respond to Brexit implications," he says. "Once details are confirmed, ports will adjust and make the most of their operating environment."

In the near future, it is likely that more facilities will be needed to accommodate freight due to additional customs checks, which should provide additional work for the construction industry. "More truck-queuing and storage areas at ports and inland logistics [will be needed] to handle delays due to document processing and customs checks," says Tim Beckett, director of consultancy Beckett Rankine.

"The major developments will be in landside facilities to minimise disruption of increased border controls," Beckett adds, stressing that aside from Brexit, there are other factors to consider. "Ports' development growth is also needed for wind-turbine assembly and maintenance, and oil and gas rig decommissioning. And the climate change-related sea-level rise will increase the frequency of flooding at port facilities, requiring flood-protection works."

Consultancy Ramboll's head of ports, Nick Clarke, adds another strand: "Brexit has made many businesses really sit down and think about their supply chains and the logistics choices embedded in them. It's been a case of knowing what the contingencies are [and asking] 'why do we do it like this?' The risk profile from Brexit impact differs among ports and while extra administration for EU-only traders is inevitable, many ports already have the systems and processes to handle 'rest of the world' trade."

Role for construction to play

By far the biggest opportunity presented by Brexit for the construction industry is the government's stated ambition to establish up to 10 free ports - areas where imported goods can be held or processed free of customs duties before being exported again, as well as being used for the importation of raw materials to make finished goods for export.

In February, the government launched a 10-week consultation seeking views on the matter, saying that locations would be announced by the end of the year and that the first sites would begin operations in 2021.

"The free-port opportunity is about the chance to drive public and private investment in a place, with a view to supporting regeneration and placemaking"

Paul Kelly, Mace

"Free ports will unleash the potential in our proud historic ports, boosting and regenerating communities across the UK," then chief secretary to the Treasury and now chancellor Rishi Sunak said in a statement. "They will attract new businesses, spreading jobs, investment and opportunity to towns and cities up and down the country."

Paul Ryan, director of economic development at consultancy Pivotal International, has long experience of advising both governments and businesses on the development of free zones, based on Ireland's pioneering work around Shannon Airport, which helped rapidly develop the country's economy. He points out that Chinese officials still visit Ireland to learn from its experience.

According to Ryan, setting up new free ports would have been "very difficult" if the UK was still subject to EU regulations. However, it should be noted that Britain currently has four free ports, in Liverpool, Prestwick Airport, Southampton and Tilbury and Sheerness.

Many EU member states also have free ports: France has one, Spain and Germany have five, and Italy has six.

Setting up a free port

Leaving the EU certainly makes it easier to establish new free ports; while free ports exist in the EU, they are mostly old and the European Commission has been increasingly tight on establishing more of them out of regulatory and state-aid concerns. But where exactly they should be located and what is involved in setting them up are complicated issues. Even if the hurdles are overcome, setting one up doesn't guarantee success. "Free zones have been set up all over the world and some of them have been successful and some of them haven't," Ryan says.

"Sometimes they have been developed politically as a panacea.

People say that they need to attract foreign direct investment and the best way to do it is to set up one of these free zones. So 'we'll just set it up and people will drop out of the sky'. That doesn't work.

You need more than an idea - it's not a cure-all. You have to have the right regulations, incentives, owner and operator, and investment in infrastructure
and facilities."

Most of all, what investors are looking for from free ports is certainty, Ryan adds. "They say 'you may have these facilities available, but if we make this investment you have to be able to deliver'. [Full] government support is essential and they've got to be sure that a change of government in three years' time doesn't mean that it is going to be reversed."

Aecom helped lead the development of London Gateway, transforming a former oil refinery into a modern, fully automated, multi-modal container terminal combined with Europe's largest logistics park

What's more, a great deal of thought has to be put into where free ports are located. "When you look at successful zones, one of the things that makes them successful is location," he says. "It's tempting to put free zones in parts of the country that are economically challenged, but if I can't service my market or get the people I need, then offering me all the incentives in the world isn't going to work."

It is also essential to ensure that the sort of industries that free ports are targeting don't end up competing with other businesses in the local economy and that established businesses can't simply move into free ports for the tax advantages, as that would simply displace economic activity rather than provide additional benefits.

Moreover, establishing successful free ports involves a great deal of investment. In part, that is about making the journey for potential investors as seamless as possible. "You've got to make it easy for me to set up my business," Ryan says. "A lot of these locations have one-stop shops where I can register my company and there are people to help me with the process.

You have to have the capabilities and skills to help that company grow."

Then there is the small matter of providing the physical infrastructure. That can be done in various ways, but where free ports have been successful, it tends to involve a great deal of state involvement and expenditure. "You have to masterplan it based on who you are trying to attract and make the infrastructure investment in terms of roads, power, water, broadband and so on," he says.

"Then you've got to decide whether you're just going to offer land or whether it's about turnkey facilities [and] about warehouses, offices and factories - or a combination of all of those. And is the state going to lead on it?

Are they going to make the investment in the infrastructure and then invite in the private sector? Will it be a public/private partnership? That's where the benefit is going to come from for the construction industry."

All of which begs the question as to whether the government's timetable for delivering free ports is realistic.

After all, it is clear that there is an awful lot of work to be done if their roll-out is to be achieved in an intelligent manner. "I think there has been thought put into it and the government can see the upsides, particularly in areas of economic disadvantage," Ryan says. "Have they looked at it in detail in terms of costing and what's really involved? No, but I think that is starting now."

Get the industry in early

According to Mace director for strategic advisory Paul Kelly, the potential of free ports isn't just about providing a boost to the economy or new work for the construction industry. Rather, they could provide a significant shot in the arm for local communities.

"The free-port opportunity is about much more than the transactional activity that happens in the operational port zone," he says. "It is about the chance to drive public and private investment in a place, with a view to supporting regeneration and placemaking, including the delivery of new homes and social infrastructure."

"Port operators share common cause with construction and engineering sectors in wanting to see more projects developed with more speed and certainty"

Nick Clarke, Ramboll

However, Kelly is also clear that if the benefits of free ports are to be maximised, the construction industry needs to be consulted early in the process: "Research has shown that, often, infrastructure owners bring in consultants too late in the process, which means missing out on the innovations and best practice, which they can bring from other projects.

It's important to remember that 90 per cent of innovation comes within the first 10 per cent of a project's lifecycle. With free ports, the importance - of early involvement is particularly pronounced. Indeed, only by bringing on the right advice and guidance at the inception phase, and working with consultants to shape a holistic proposition, will our nation's ports be able to fully realise the wider socioeconomic potential they can unlock."

Peter Neville-Jones, technical director for ports at Aecom, says the early involvement of consultants and contractors should be relatively easy given that, unusually from an international perspective, the vast majority of UK ports are privately owned. "Early contractor involvement is very different in the private and public sectors - the public sector process has to be seen to be fair to all tenderers, while the private sector has to achieve the best price for the company," he says.

"Private companies can discuss their plans at the outset with interested contractors, whereas public bodies need to take a more formal approach.

For major and complex works, early contractor involvement is essential at the design development stage. The final tender should allow tenderers to propose works constructed by quite different methods, such as rubble mound or caisson breakwater, excavated versus directionally drilled pipeline landfalls, and drilling and blasting versus cutter suction dredging in rock."

Ward agrees that working together from the start can help. "It can ensure that projects are more constructible, make best use of new contractor methods, are clear and focused on the port's needs to an agreed timetable, taking into account contractor work methods, as well as port operating requirements and constraints," he says. "It also allows new ideas at an earlier stage and bidding contractors to better prepare for optimised tender submissions, with clients working to more accurate budgets and programmes."

Where is the money?

In terms of attracting investment for free ports, commentators are also in agreement that private sector funding will be forthcoming if the government gets the model right. "The UK ports sector has been highly successful in attracting long-term, patient capital both from within the UK and from around the world, such as pension and specialist infrastructure funds," Ramboll's Clarke says. "Recent transactions, such as at Forth Ports and Peel Ports, have demonstrated that the sector continues to be attractive to investors, who include 6.2 million UK pension fund members. So, as a sector, particularly for the larger ports, we have the backing from our investors to continue to develop good projects."

Ward agrees. "The majority of UK ports are privately owned, with investments relying on investment business cases," he says. "These can be for a particular trade-growth opportunity, to accommodate trade changes, maintain or improve assets or respond to competition, and protect existing trade and customers."

That just leaves the planning system.

The government has indicated that it could change planning regulations to facilitate the development of free ports - something that would be welcomed by operators, developers and contractors alike. "I think the port operators share common cause with construction and engineering sectors in wanting to see more projects developed and done so with more speed and certainty," Clarke says. "One of the keys to achieving that is looking at the planning system and finding ways to make it more responsive to investment."

He concludes: "We have the demand for more development - it's often the regulatory environment rather than capital that constrains projects moving forward.

Streamlining the rules around port project development, while still retaining high standards, is good for the ports and good for the whole country."

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