By Tarun GeorgeFree Trade Zones are a big part of the sales pitch for many Latin American countries, but the challenge for investors is finding facilities that are up to the demands of 21st century professional services requirements . The fact is that most FTZs are textiles, manufacturing and goods export-oriented, which are now being repackaged to fit the BPO and ITO industry.
In this special Q&A with Nearshore Americas, Mario Tucci, a respected global business consultant and former executive with Tata Consultancy Services, tells us why that won’t cut it anymore, and why companies are looking for benefits far beyond purely tax savings.
What is the Free Trade Zone maturity in Latin America? Are FTZs targeting what companies need?
Tucci: Free Trade Zone pockets have existed in Latin America for around 30 years in countries like Mexico, Dominican Republic, Costa Rica, El Salvador, Chile, Brazil and Argentina. But most of them are still structured as duties and customs areas, relating to free transit of merchandise, goods and manufacturing. They’re not compatible with the call center situation.
However governments realized that they could reuse these same tools to attract investors in the services industry. Operators of FTZs also realized that they can’t just give a piece of land or a warehouse to services companies; they really had to make it easier for firms to set up service centers. I believe that Latin America is in a very early stage of leveraging FTZs as ‘service locations’. So while it’s reasonable that the next chapter of FTZs is the service industry, it’s not obvious that all of them will be able to make that change and reinvent themselves. In my opinion they need to provide more of a ‘technology park’ atmosphere than an FTZ environment. We need a location that resembles Silicon Valley – a great place for IT work, with nearby universities providing talent. Although there are some good LatAm examples, you still don’t see that in most cases.
Uruguay has good examples of sophisticated FTZs that understood early in the game that you need to provide additional services.
So countries must target their FTZs specifically towards the services industry in order to bring real value to companies. Are buy-side firms actually being attracted by FTZ incentives?
Tucci: Governments are trying to understand how to market to the services industry. They’re still going at it from a cost-savings standpoint just using the tax incentives that FTZs offer. But countries must define specialized locations where you put together not just tax incentives, but also the necessary IT infrastructure and connectivity, and then you invite an ecosystem of universities and R&D organizations. Firms are still coming for pure cost-savings, but the FTZs would be much more attractive if they were designed in this way. That’s what companies are looking for.
The services industry requires a lot more sophistication than what the FTZ operators are used to. It’s much better if the park offers companies the necessary facilities than each individual organization trying to build by themselves. Many operators are more concerned about getting approval to operate services FTZs, but don’t have expertise in what to provide.
Which countries would you say have the best FTZ incentives for BPO and ITO?
Tucci: Uruguay has good examples of sophisticated FTZs that understood early in the game that you need to provide additional services. Those services are anything from offering the best technology, to creating nice restaurants and an environment that young people would like to work in.
Colombia is approaching this issue in a different way, by allowing you to become an FTZ yourself. If companies have a sufficient investment or sufficient employment offer, then they are given FTZ status. Colombia also has around 65 FTZs, but we don’t see a very organized approach towards them. I believe that will happen this year, and the Colombians will really organize and target them using the outsourcing knowledge they have gained.
The Dominican Republic, Costa Rica and El Salvador have also done a good job converting their clothing manufacturing facilities into services FTZs.
Talking about Uruguay, is the country ready to climb the value ladder to ITO and BPO? Is there the technical skill and English proficiency available?
Tucci: Uruguay has the perennial issue of size. You cannot expect an IT operation here to be large in size; it has to be large in value. A good example is Sabre Holdings. They started outsourcing a help desk kind of function here, but they soon discovered that the infrastructure and talent pool in Uruguay allowed them to also outsource finance and accounting, and even some IT functions. There are two new FTZs in Uruguay that are fully related to services – Aguada Park, and the World Trade Center.
The Uruguay government has identified five aspects of the Uruguay economy to focus on, and one of them is the services industry. Another one is education. I believe that in Uruguay there is still opportunity to grow a technology business. But with TCS and some other large players being here, the ITO industry is stretched, and there are definitely scalability issues. But on the BPO and KPO side in Uruguay it’s much easier to grow, and you’ll definitely find the English talent you need.