LatAm Free Trade Zones: Are they Really Built to Support BPO and IT?

Over the years, the US has been Latin America’s primary outside investor and leading trading partner, followed by Western Europe. Latin America’s leading imports in past years have …

Over the years, the US has been Latin America’s primary outside investor and leading trading partner, followed by Western Europe. Latin America’s leading imports in past years have included cars, chemicals, electrical equipment, farm machinery, and pharmaceuticals, while its leading exports include bananas, coffee, cotton, meat, wood, and rubber.

Many of the firms within these industries are located in Free or Foreign Trade Zones (FTZ).  While these industry sectors will continue to be valuable to neighboring countries, the largest US import most recently to Latin America has been jobs. More importantly, opportunities that can offer the local labor force high wages and the ability to utilize the skills acquired through education and/or job experience.

A powerful attraction in conducting business in this area is the high unemployment rate in every Central American country except Costa Rica and Panama, which translates into an inexpensive pool of labor that drastically reduces the cost of operating a customer contact center. Most American businesses in Latin America support the US market, rather than their own domestic markets.

An Instrument of Commercial Policy and Development

But what exactly is the purpose of an FTZ? Originally, the focus of an FTZ was to develop industrial activities of goods or commercial services with the purpose of creating jobs and engaging new capital investments.  FTZs were first established more than 2,000 years ago. Within the last half of the 20th century, FTZs have undergone substantial changes and adaptations as the result of an exponential growth in world trade. As an instrument of commercial policy and development, FTZs have been transformed and adapted to the realities and local conditions of each region. The FTZ is chosen as a location for business activities moving nearshore, in search of a low or lower cost basis. All of the benefits the FTZ can offer manufacturer, Business Process Outsourcers (BPO) and processors are too numerous to list here. To highlight a few main benefits that account for most of the companies that use the Zones program: tariff relief, duty elimination and weekly entry savings are just a few. While it is easy to see that a manufacturer would benefit greatly, but focusing on the job creation and capital investment is where the benefit for customer contact center would come into play. What benefits does an FTZ offer a Business Process Outsourcing (BPO)? 

BPO’s are attracted by Latin America’s proximity to the United States and its availability of highly skilled employees who are willing to work for low wages (at least compared with the United States). From a customer’s perspective, the three main attributes of the FTZ can be summarized in one well known marketing adage, ‘LOCATION, LOCATION, LOCATION’. This adage is not simply related to the positioning of a FTZ but also relates to global trends in outsourcing and the whole process known as globalization.  

Operate Largely Tax-Free

For example, tax exemptions in Costa Rica include:

• Capital tax (10 years)

• One-hundred percent income tax exemption for eight years, then 50 percent for the next four years

• Sales tax

• Property tax

• Real estate transfer tax

• Withholding tax on payments made outside of Costa Rica.

Income tax exemptions of up to 12 years are available in certain circumstances. Another benefit to conducting business in Latin America is simplified customs clearance procedures, according to Pilar Madrigal, director of international affairs for the Costa Rican Investment Board, or CINDE, a San Jose, Costa Rica-based nonprofit organization that helps advance the country’s social and economic development.

Accessing the Right Labor Pool

While tax benefits are strong, the key for any BPO is the possibility of finding trained, available and nearby human resources. The Bogota Free Trade Zone (BFTZ) has become one of the best developments for BPO operations in Colombia, as well as Latin America. One key is that over 44% of Bogota’s population lives in neighborhoods around the BFTZ, while there is a much lower concentration on other zones in Bogota.

Also, BPO training programs within the premises of the BFTZ with access to the BFTZ employment portal (which has more than 2,800 resumes for BPO services) while staff recruitment processes must usually be contracted. More than ten (10) BPO companies are currently operating at the BFTZ generating more than 8.000 direct jobs. Such companies include UPS, Samsung, Teleperformance, Genpact and ParqueSoft. Lastly, many restaurants, banks, a medical center, internal bus transport, are located within the BFTZ creating its own mini municipality as access to El Dorado Airport and public transportation has been improved. 

While access to labor is important, the access to the “right” labor is paramount.  FTZ’s are typically far away from business areas in the city and from most of the bilingual population. According to David Aponte, Investment Director with Invest in Bogota, “an important event will be the new Transmilenio route that will transit through Calle 26, and will have a “feeder” route that goes straight to the FTZ. This will help bring the bilingual population closer to the area via a transportation system largely used by bilingual students and young professionals”.

Also, the BFTZ is developing a joint strategy with Rosetta Stone so businesses or individuals of the BFTZ can acquire licenses to study and learn virtually.  While access to bilingual labor is important, the location of the FTZ could hamper the ability to attract due to its location within the city. Nicaragua has clearly seen this as a problem and has worked to address this immediately. Actually in Nicaragua’s case FTZ regulation is quite flexible and does not refer to a geographical location, but more so to a fiscal incentive system.

According to Javier Chamorro, Executive Director of ProNicaragua, “we’re allowed to declare a FTZ in any physical area we decide, which can even mean partially declaring infrastructure a FTZ (i.e. a FTZ can be one floor within a building or a specific office within a floor).”  In this case, a potential investor would only have to select a site within a particular area of Nicaragua and the local authorities would declare that property an FTZ site”.  As our clients site selector, what we would do is find the exact location that offers maximum financial advantage to the BPO and have the authorities grant FTZ status to the site.

Manufacturing Dominates; Services Qualify

While manufacturing remains the dominant activity in free trade zones, service activities generally also qualify for FTZ status. As such, the need for improvements in the telecom infrastructure is vital. Concerning the IT infrastructure, a high speed data connection and access to the Digital Network System is required. Investment and adaptations are required for energy and be available.  The Free Trade Zone must be outfitted with the infrastructure for all major utilities. Excellent electricity and telecommunications systems must be in place. For instance, the BFTZ has a double supply ring at different tension levels and 24-7 electrical emergency support. This will allow savings in investments and fines due to the unavailability of services. The equipment shared infrastructure and the availability of connectivity & energy within the FTZ will generate savings in high-cost investments such as a contact center.

As can be seen from the above, there are numerous business and investment opportunities in Latin America, each of which has its individual advantages and disadvantages. Nonetheless, setting up shop in Central America is no guarantee of a successful business. Anyone wishing to establish a business there must be sure that there is a viable niche for that business in the chosen country. This means locating information about the chosen locale to find out the benefits, as well as the shortcomings of doing business there. In the last few years, we have been approached by several small and midsize BPO companies based in the United States looking for opportunities to reduce their costs and are searching for excellent services that can trigger them to newer opportunities. The economic downturn may have helped speed up the process of companies expanding to Latin America.

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There are many other substantial benefits that the Zones program has to offer BPO’s, but the benefits listed are the key benefits that attract most companies to the Zones program. More and more companies look globally when deciding to locate or expand a new back-office facility. When these companies make these location and expansion decisions, they do take into account all costs of services in a certain country. The FTZ’s can play an important role in providing a level playing field when investment decisions are made and have proven to be a success by creating and retaining jobs and capital investment in Latin America.

For additional insight on Jeff’s recent economic analysis of Latin America, feel free to contact me at 214-696-4364 or email [email protected]

Jeff Pappas was included on Nearshore America’s Power 50; our annual list of the most powerful outsourcing executives. He is the Executive Vice President of Arledge Partners Real Estate Group (http://www.arledgepartners.com), located in Dallas, Texas. Arledge Partners focuses on international site selection, labor analytic studies, incentive negotiations and real estate identification and acquisition for the contact services/BPO industry.

 

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