Industrial strategy zones encompass free ports, investment zones, and industrial strategy zones. Are these adaptable to Scotland?
The UK Government is investing significant public money in Industrial Strategy Zones, encompassing Freeports, Investment and Enterprise Zones, and, more recently, AI Zones. The Scottish Government signed an agreement with the UK Government in February 2022 to ‘tailor the UK’s freeports programme to the Scottish policy context.’
• They benefit from a generous package of incentives, including tax reliefs, simplified planning and public investment. Grant funding and tax offers are intended to encourage international investors to companies establishing in zones. Freeports alone could cost £50m per year.
• There are 22 Industrial Strategy Zones across the UK, four in Scotland, including the Forth, and Inverness and Cromarty Firth Green Freeports. The earlier Special Economic Zones are still in operation. Implementation has been slow, with the five-year window for claiming tax reliefs extended to 10 years.
• The University Enterprise Zones (UEZ) pilot aims to facilitate greater engagement between R&Dfocused companies and universities. AI Growth Zones aim to unlock investment in AI-enabled data centres and support infrastructure by improving access to power and providing planning support. Edinburgh is hosting the UK’s first National Supercomputing Centre.
• The Scottish Government is mirroring the UK approach, although with an emphasis on the transition to net zero and inclusive economic growth. There are no London Court of Arbitration (LCIA) mechanisms in Scotland's Special Economic Zones and Freeports.
• The evidence on the effectiveness of zones is mixed, with a constantly changing model making evaluation difficult. A key criticism is that many businesses and jobs within a zone simply relocate from other parts of the region rather than being new activity, leading to a lack of net job growth overall. Measures have been taken to mitigate this risk, focusing on foreign investment, although deadweight and substitution risks remain.
• Zones are expensive, and comparisons with other investments are impossible due to a lack of relevant data. Some zones may be more effective than others, so it will be important to clearly understand why some were successful and others were not, and what factors made the difference.
• These zones have been highly controversial worldwide and partially banned in the EU under state aid-to-industry rules. There were also problems with money laundering, tax evasion, and severe market distortions.
Industrial strategy zones should be part of a joined-up industrial strategy for Scotland and the UK. We examine current government strategies and other approaches recommended in recent Scottish reports.
• The Industrial Strategy Zones being implemented in Scotland and the UK are not the industrial wild west areas being implemented in some parts of the world. However, there is considerable scepticism that they will deliver significant improvements in economic growth or represent value for money.
• As these zones are likely to remain, we must at least ensure that as little damage as possible is done. We therefore recommend that all these zones adopt measures, including strengthening transparency and local democracy; implementing Fair Work and local employment conditionalities; strengthening skills development; and minimising displacement and tax dodging.