Nigeria’s Free Trade Zones (FTZs) are facing trade abuse allegations from manufacturers who cite loopholes in regulatory oversight.
Nigeria’s FTZs were created to drive industrialisation, diversify export earnings, and attract Foreign Direct Investment (FDI) but abuse concerns are rising as local manufacturers cite loopholes in regulatory oversight.
Yet, new tensions are emerging. Local manufacturers and industry groups are raising red flags over the 100 percent allowance that enables companies operating in FTZs to sell goods directly into Nigeria’s customs territory without facing some of the same tax and regulatory burdens as indigenous manufacturers outside the free zones.
The concerns are coming as the federal government moves to introduce a 25 percent Company Income Tax (CIT) on FTZ entities through the proposed 2024 Finance Bill, sparking fears of policy instability that could choke off critical investments at a fragile moment for the economy.
“Free Trade Zones have been integral to promoting manufacturing in many developing and developed countries,” explains Samuel Sule, CEO Renaissance Capital Africa.
Free Zones are designed to stimulate foreign direct investment (FDI), boost industrialisation, and create employment opportunities hence a difference in the duty regime for inputs.
These benefits enjoyed by entities under the free zones have allowed them to create more than 500 thousand jobs and generated over N650 billion through various government agencies and schemes, including the Nigeria Customs Service, Nigeria Ports Authority, Nigeria Immigration Service, and P.A.Y.E in the last five years.
Available data show that Lagos Free Trade Zone (LFTZ) Command of the Nigeria Customs Service has more than quadrupled revenue from N25 billion in 2022 to N358 billion in just two years.
And just in the first quarter of this year, the Command responsible for Lagos, Lekki, Dangote, Alaro City, and Eko Atlantic Free Trade Zones recorded N113 billion in revenue, underscoring the economic importance of the free zone in Nigeria’s fiscal stability.
FTZs: A growing economic engine
According to data from the Nigeria Export Processing Zones Authority (NEPZA), Nigeria currently hosts 46 licensed free zones, although fewer than half are fully operational. Active zones like Lagos Free Zone, Alaro City, , and Lekki Free Zone have attracted billions of dollars in private investment, spanning manufacturing, logistics, and services.
Lagos Free Zone alone has attracted more than $2.75 billion in foreign direct investments (FDI) year-to-date with projections of hitting $12 billion by 2032. It houses big firms both local and international such as Power Oil, Kelloggs, Colgate, Dano and just recently opened Italian-owned Guala Closures.
LFZ has over 30 registered companies with plans to expand to 150 over the next few years. But inconsistent policies, coupled with currency fluctuation are putting investors on “cautious mode”.
Alaro City, which became operational barely six years ago, has spurred over $1 billion in economic development across key sectors such as manufacturing, healthcare, and logistics sectors. It is home to investments by notable global and local businesses such as TY Holdings, Mantrac (CAT), Ariel Foods, Kenol, SANA Group and international real estate developers and investors.
Its first client, Ariel Foods, the largest Ready-to-Use Therapeutic Food (RUTF) manufacturing plant in West Africa, changed Nigeria from a net importer of RUTF to a net exporter, exporting to about 17 countries.
“Many international investors are interested in bringing investments here. They are just waiting for the naira to stabilise, which it’s already doing; and observing activities within the minimum wage and the tax reform bills,” a top executive of one of the free zones who is knowledgeable about the matter said.
With the completion of the Lekki Deep Sea Port, FTZs located along the Lekki corridor are expected to consolidate Nigeria’s position as a regional trade hub, facilitating more investments and growing Africa’s biggest oil producer revenue base.
Local manufacturers cry foul
Sources who are conversant with the matter disclosed to BusinessDay that the primary grievance among Nigerian manufacturers is the huge cost disparity between companies operating within the customs territory and those in FTZs.
One of the sources said manufacturers who import raw materials and operate outside FTZs pay as high as 35 percent on essential raw materials such as palm oil and ethanol.
Meanwhile, competitors within FTZs bring in the same raw materials duty-free, process them, and allegedly sell their finished products within Nigeria’s local market without fulfilling their tax obligations. Yet free zone entities have the same treatment when exporting to the customs controlled territory – Nigeria’s local market by paying applicable duties similar to importing from other countries.
With this, the Free Zone simply provides an avenue to retain the jobs here and increase the country’s productivity and industrialisation plans, contrary to the views of other manufacturers.
“This practice creates a deeply uneven playing field. A company operating outside an FTZ may have a final product cost that is nearly 10 times higher than a competitor benefiting from FTZ privileges,” said one of the sources who is a senior business owner. “This cost structure forces compliant businesses into losses and, in extreme cases, into bankruptcy,” the source added.
According to Segun Ajayi-Kadir, the director-general of Manufacturers Association of Nigeria (MAN), “tax exemption enjoyed by the companies operating within the zones renders more than 2,500 members who operate outside the zone less competitive”.
Kadir added that this position is not consistent with the law and it undermines tax-paying entities operating within the customs territory and producing similar goods and services.
NEPZA Act of 1992 permitted 25 percent sales in the Customs territory. But under the current FTZ framework, firms operating within the zones are allowed to sell 100 percent of their output into Nigeria’s customs territory, provided they pay applicable duties on imported inputs, according to the 2004 NEPZA Regulation and a Presidential directive.
This provision, originally intended to create flexibility and stimulate local production, is increasingly seen by domestic manufacturers as a loophole that allows FTZ firms to enjoy: tax exemptions cheaper infrastructure (power, logistics, water) provided by the zones, while competing directly with local firms struggling under multiple tax burdens, poor infrastructure, and inconsistent policy environments.
“How do you expect a manufacturer paying over 30 different levies and operating on diesel generators to compete with a tax-exempt competitor?” said a Lagos-based textile manufacturer, requesting anonymity for fear of reprisals.
According to MAN, over 60 percent of manufacturing costs in Nigeria are tied to energy, logistics, and regulatory inefficiencies—all areas where FTZ firms have significant advantages.
But are FTZs entities really the source of the problem? Critical infrastructure enjoyed by firms in the free zones are usually not provided by the government but the administrators of the zones themselves. These huge costs of constructing roads and generating self-electricity are being cushioned by the tax reliefs, said an expert.
However, concerns about sharp practices and regulatory loopholes present an opportunity to enhance regulatory oversight and enforcement, the expert added.
“In the event the goods are sold to the domestic market, applicable duties should be charged by the tax authorities. The issue here is partly implementation, the inefficiency of our clearing systems and the additional costs of importing by non-FTZs entities,” Sule said.
Laxity in enforcement of rules fuelling abuse
The abuse of the incentives and or privileges within the FTZs are as a result of the laxity in enforcement of laid down rules which has now amounted to unfair competition with non-FTZ entities, according to an inside source who pleaded anonymity.
The source noted that these firms sell almost 90 percent of what they produce to the customs territory contrary to the very essence of creating an FTZ – primarily established to grow exports.
“There has been a lot of abuse as a result of regulatory failure. That, for me, I think, is the biggest issue,” the source said. “Unfortunately, some innocent people who are not part of the abuse process will now pay the price for these actions of the government.”
Tax reforms to bridge the gap?
Nigeria’s tax reform bills championed by Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reform Committee seeks to introduce new tax obligations for FTZ operators by proposing a mandatory minimum tax rate and removing long-standing tax exemptions previously granted under the Nigeria Export Processing Zones Authority (NEPZA) and the Oil and Gas Free Zones Authority (OGFZA) Acts .
According to Oyedele, allowing FTZ entities to sell goods in the customs territory without taxation creates an unfair advantage over local manufacturers who are subject to tax regulations.
“If a free zone entity can sell to the Custom Territory, competing with people who are paying taxes and not paying taxes, that’s the best way to create economic distortion, and that is not the intention”, he said during a public hearing on the tax reform bills at the House of Representatives.
But this may also pose more burden on entities within the free zones who brought in investments on the already existing provisions of total exemption from taxes under the currentfree zones regulatory regime.
In an interview with this reporter, Toyin Elegbede, executive secretary of the Nigeria Economic Zones Association (NEZA), said the new legislation under the tax bills “could force companies to limit their operations or even relocate to neighbouring countries with more flexible trade policies.”
“This potential exodus would erode Nigeria’s revenue base and weaken the country’s competitive industrial capacity.”
Elegbede noted that if the government insists on imposing a minimum CIT on free zone operators, then it is essential to recognise the need for a transition period of up to 20 years. This extended period, according to him, will enable free zone operators to recalibrate their business models and financial strategies in response to any new regulatory requirements.
“A long transition period is essential for mitigating adverse impacts on investment decisions and preserving the sector’s continued economic contribution.”
Local manufactures should also get more incentives
Industry stakeholders are demanding urgent government intervention to restore fairness in the system by ensuring stronger Custom enforcement, reviewing FTZs policy frameworks and provide more incentives to local firms.
“In my view, manufacturers that are producing in our own domestic customs territory should be given much more incentives so they can have more investment,” said a source who will not like to be quoted.
Economists warn that mishandling the issue could lead to two dangerous outcomes: investor flight from the FTZs, if terms are seen as unstable and or deindustrialisation outside the zones, if local manufacturers are left to compete under unfair conditions.
Experts suggest that Nigeria can manage the tension by adopting reforms seen in other successful FTZ ecosystems like Vietnam, UAE, and Mauritius where there’s a limit to the percentage of goods from FTZs that can be sold into the local market and mandate that a certain percentage of inputs used by FTZ manufacturers must be sourced from Nigerian suppliers.
As Nigeria’s over $200bn FTZ dreams face their sternest test yet, clarity, consistency, and competitiveness must guide policy decisions
