Free Trade Zone Laws Are Reformed, Adapting to Reality of Telework

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Covid-19 could have knocked out Free Trade Zones (FTZs) in Latin America had it not been for the fast reaction of the region’s governments. Intent on protecting these points of vital economic activity, most governments granted legislation that allowed FTZ employees to work from home on a temporary basis. Now, with economies slowly regaining their footing, stakeholders are looking ahead to ensure that the zones will continue to operate once the pandemic has been left behind. With the risks to health still abundantly clear and the work from home switch having changed attitudes to home working, some countries in the region are rethinking their FTZ regulations.

“Most countries created a temporary telework legislation when the pandemic began,” Maria Camila Moreno, Executive Director of the Free Trade Zones Association of the Americas (AZFA), a group that promotes FTZs, told Nearshore Americas recently. “Some governments are re-evaluating the new situation and the link to the FTZ – that it is a geographic area where workers are required to be present. That’s why Colombia has changed its legislation and why Uruguay is considering to follow.”

FTZs wield serious economic clout in Iberomerica. As of 2018, there were more than 600 FTZs, accommodating 13,200 companies that provide 1.7 million jobs. These FTZs contribute, on average, 4.6% of the GDP of the countries they are located in, according to AZFA data. Zones in Costa Rica punch well above their weight, contributing 8% of the country’s GDP.

Though the tax incentives in an FTZ are well known – companies located in Colombia’s FTZs pay 20% income tax compared to 33% outside it – the real reason for companies to choose to locate themselves there is the infrastructure they provide, says Leandro Bonilla, General Manager of the Zonamerica Business and Technology Park in Cali, Colombia: “Tax breaks are helpful but are not the main driver for outsourced companies to set up in the FTZs. We compete on the quality of infrastructure we provide, the services on offer, the campus feel and the possibility of scaling up.”

The quality of infrastructure and services is high on the agenda and has seen FTZs play an important role in the vaccination rollout over the past year. All vaccinations arriving in Colombia have entered through the Bogota Free Trade Zone, because, said Moreno, “it is a secure and controllable environment.”

Within the FTZ world, service companies including IT, software, shared services, call center and BPO companies play a large and growing role. Venancio Trigo, a member of the Chamber of the Free Zones of Uruguay, says that despite Uruguay’s FTZs having a strong industrial history, agriculture and raw material services are no longer the main focus of investment for the FTZs. A Mercosur regulatory change on exported goods in 1994 and the subsequent diversification of industries within Uruguayan FTZs switched the emphasis to high-value service exports, which are gaining ever-greater traction. “Service company investment is growing every year,” Trigo said.

Service companies mean offices and offices mean laptops. Unlike their industrial counterparts, service company employees have the freedom to move. When the pandemic hit, those in Uruguay’s FTZs did just that. “Uruguayan law does not permit any activities of a company based in the FTZ to be done outside of the FTZ. But because of the pandemic, a resolution was made to allow 100% of company employees to work from home,” said Trigo.  

A year after the pandemic’s arrival, temporary measures are becoming permanent and the foundation of the FTZ – that all activity takes place within its limits – is being turned on its head for good.

In Colombia, legislation has been passed to permanently allow half of the workforce to work outside of the physical FTZ space. “On March 15, a decree on FTZs was made by Colombian authorities. Among the many innovations was a ruling on telework, allowing up to 50% of service employees to work from home,” Comelo explained.

The same conversation is now taking place in Uruguay, where 11 operating FTZs support 15,337 jobs. Almost 70% of those jobs are through service companies. Aguada Park, WTC Montevideo Free Trade Zone and Zonamerica account for the majority of IT, tech, BPO and shared service companies present in the country’s trade zones.

Lydia Cazaban, General Manager at the Chamber of the Free Zones of Uruguay says that though there is no regulation yet in place beyond the end of temporary measures, the chamber is hopeful that the government will respond positively. “We are trying to reach an agreement with the government to accept a rate of between 20% and 30% of the time of the employees to be spent outside of the zone,” she said. In the meantime, companies should prepare for a return to the pre-pandemic trade zone regulations.

FTZ operators now face an unexpected challenge. With the Colombian law change and potential for Uruguay to follow, the issue of expensive FTZ real estate falling into disuse is genuine. Outside of what are likely to be long-term health concerns in the workplace, many workers simply do not want to return to their former workplaces. According to a global study from staffing firm Robert Half, 1 in 3 professionals say they will quit and look for a new job if they are forced to return to the office. These considerations, and a still uncertain economic outlook, could mean companies begin to question the need for FTZ real estate in the post-pandemic era.

 “The answer to the question hasn’t arrived yet, but we believe that yes, real estate will still make sense,” said Leandro Bonilla. “Offices are needed for training, for team-building purposes and for general use. But we think it will be much more linked to work from home possibilities; the hybrid model,” he added.

Zonamerica, which houses 48% of all of Uruguay’s FTZ workers at its 92-hectare site in Montevideo, does not expect a major slowdown in demand for office space. In fact, at its newest site in Cali, Colombia, interest is growing from IT and outsourcing companies in particular. The 400 workers currently employed there will rise to 800 by the end of the year Bonilla expects, with part of that growth due to returning workers. The site’s three buildings are set to turn to 17 in the coming years, with one built each year on average.

Despite a change that would appear unfavorable for his company, Bonilla is positive about the impacts of remote working for FTZs and the companies located in them. “For the industry it will be interesting. For example in Cali, there is a great talent pool. But this regulation change will allow us to hire wherever and to attract the best talent even if it isn’t in Cali. This will allow companies to optimise operations with additional specific talents from outside the area. Before, this was a restriction – companies had to pick an FTZ where they thought they’d find all the talent they needed. The telework change will be positive for Colombia. Regional economic development can still be achieved,” he said. 

Ahead of the decision in Uruguay, there are concerns that the unease of the country’s powerful FTZ operators may hold significant influence. “Several actors are concerned. One is the FTZ landlords because they rent offices. This change would not benefit them,” Trigo said. 

Uruguay must be able to provide the type of FTZ benefits that multinationals require, Cazaban believes. Uruguay’s Legal Stability Contract is a huge boon for the country, providing legal insurance that the terms of a company’s FTZ contract will not be altered for 30 years regardless of any change in government. This helps differentiate the country as an investment location within Latin America’s politically unstable landscape. But in this new world, companies may well begin to seriously consider other benefits, precisely like the freedom to work outside of the zone’s physical space. “In services, we compete regionally with countries like Costa Rica and must therefore have very high standards. Most FTZ companies are international and if we don’t meet their requirements we have a problem,” she said. 

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