SELECTING AN OPERATOR
An Essay by Greg Jones

The real test of a Foreign-Trade Zone project's effectiveness is the extent to which it satisfies the goals and expectations of the community it serves. A General Purpose Zone is of little value unless businesses use it. For businesses to use the Zone, save money, and expand or keep their operations in the community, the Zone must be fully operational.

Upon a grant of authority, the Grantee must address the processes of administration and operation of the Zone. The Grantee must decide who will run the Zone and what services the Zone project will offer. One of the questions the Grantee must answer is, "Who will be the Zone Operator ?" There are many different notions as to what constitutes a Zone Operator. These range from warehouseman to real estate developer to administrator. However, as far as the U.S. Customs Service is concerned, the Zone Operator is that party which accepts direct Customs liability for Zone operations under its Foreign-Trade Zone Operator's Bond.

Some Foreign-Trade Zone Grantees elect to operate their General Purpose Zone themselves. In doing so, the Grantee maintains the greatest direct control over Zone operations, yet also directly bears responsibility and Customs liability for the Zone's operation. Many Foreign-Trade Zone Grantees subcontract the responsibility to operate the General Purpose Zone to a separate company in an attempt to distance themselves from substantial liability. It is important to note however, that if this choice is made, it will not totally absolve the Grantee from liability. In fact, it has been stated by Customs and acknowledged by the Foreign-Trade Zones Board that the Grantee does not completely shed its liability. However, a number of Grantees have positioned themselves to reduce the risk of liability by hiring independent companies to be the Operators for their Foreign-Trade Zones.

Too often, when a Grantee hires a Foreign-Trade Zone Operator, its selection process is motivated by the desire to reduce Customs liability instead of the desire to fully develop its Zone's trade and economic potential. In selecting an Operator, Zone development should be a major consideration in addition to reduction of potential liability.

As previously indicated, each Grantee has choices to make about the Zone's Operator. It can decide to operate the zone itself, or hire an outside firm. If it chooses not to operate the Zone itself, it can hire a single firm on an exclusive basis or it can hire multiple firms. It can hire warehousing firms, real estate developers, or administration firms. To make the right choice, for its Zone project, the Grantee must ask itself several
fundamental questions.

Question # 1:

What are the goals of our Foreign-Trade Zone project?
Which of the following do they encompass?

A. Enhancement of cargo related activities
B. Development of industrial and commercial real estate
C. Enhancement of area trade and economic development
(1) Enhancing competitiveness of area businesses
(2) Attraction of new industry

Question # 2:

Based on the answers to Question #1, what are the responsibilities which have to be met within the scope of the total Zone project, and who will be responsible for meeting each of those responsibilities?

In reference to item "A" in Question #1, responsibilities include:

i. Providing physical facilities for storage and handling of cargo
ii. Activating the site with U.S. Customs
iii. Development and implementation of operating procedures and systems
iv. Development and maintenance of records and reports that are necessary for the U.S. Customs Service and the Foreign-Trade Zones Board
v. Developing and implementing a marketing plan

In reference to item "B" in Question #1, responsibilities include:

i. Providing site infrastructure and physical plant facilities
ii. Obtaining, or assisting in obtaining project financing
iii. Activating or assisting in the activation of sites with U.S. Customs
iv. Development and implementation of operating procedures
v. Monitoring the day-to-day operations within the zone
vi. Development and implementation of operating procedures and systems
vii. Development and maintenance of records and reports that are necessary for the U.S. Customs Service and the Foreign-Trade Zones Board
viii. Developing and implementing a marketing plan

In reference to item "C" in Question #1, responsibilities include:

i. Providing services to Zone users (for both existing industry and new industry). These services, will include assistance in activation, development of operating systems and procedures, monitoring the day-to-day operations, and recordkeeping. This will require a working knowledge of the following subjects:

A. Foreign-Trade Zone procedures and regulations
(1) Activation Procedures
Procedures/paperwork
Systems/Inventory Control
(2) Operational Procedures
Day-to-day procedures/paperwork
Internal compliance reviews
Troubleshooting/prevention
Reporting

B. Customs Matters
(1) Classification and valuation
(2) Harmonized Tariff Schedules
(3) NAFTA, other trade programs/Customs procedures

C. Production, Logistics and Distribution
(1) Sourcing patterns
(2) Production methods, practices and philosophies
(3) Distribution methods, practices and philosophies
(4) Transportation systems and services

D. International Trade Environment
(1) U.S. Foreign Trade Policy
(2) Trade Agreements and how they work
(3) Mechanics of international trade
(4) Political and economic justification of FTZ program in relation to U.S. policy
(5) Reporting and data collection as policy making tools

ii. Marketing the Zone: This will involve the development and continual use of several marketing tools:

A. Promotional Materials
B. Business Contacts
C. Direct Marketing Seminars
D. Marketing through customer relations
E. Training Customs officials and Customs brokers

Question # 3

What are the capabilities and resources of the Grantee and the potential Operator?
Can both parties meet their respective responsibilities based on considerations identified in Question #2?


Question #4

How will Zone users pay for services? Will/can either the Grantee or Operator sustain financial losses in the early stages of operations?

Question #5, the BIG QUESTION:

How will the way in which we address Questions 1 through 4 affect our Zone's Long term development? How can we correct mistakes?

Let's identify some facts and factors to consider in finding the best answer for your Zone project.

Obviously, the goals of the Zone project and the scope of services offered by potential Operators will determine the allocation of responsibilities among the Grantee and Operator (or Operators). These goals will also affect decisions about who will operate the zone and/or how many Zone Operators there will be.

Many Zone Operators are often owners of public or contract warehouse facilities and/or a developers of real estate which have other business interests in addition to operating zones. If a Grantee elects to consider such a firm, it should develop a set of criteria that will assist it in selecting an Operator that will ensure the best possible development of the Foreign-Trade Zone. Too often grantees have entered long-term exclusive contracts with warehousemen or developers only to find themselves at cross-purposes with their Operators. In many of these cases, overall Zone development has been stifled in the interest of selling land, leasing warehouse space, or handling and storing merchandise.

Does this mean that a Grantee should not hire a real estate developer or warehouseman as an Operator? No, not at all. It simply means that the Grantee and the prospective Operator must sit down before an Operator's Agreement is developed and reach a clear understanding of the goals, objectives and interests of each party. Obviously, common interests must be present. These should be easy to deal with. Other interests may be parallel between the parties and still other interests will be divergent. It is the handling of parallel or divergent interests that will spell success or frustration for the Grantee, the Operator and the community which they serve. Each party must respect and accommodate the interests of the other. At the same time, the Grantee must maintain its own flexibility for the future development of the Zone and its other businesses without hindrance or interference from the Operator. Ideally, of course, the Grantee and Operator should work hand-in-hand toward the same or parallel goals. The worst mistake some Grantees make is that of entering into an exclusive Operator's Agreement with a firm that is not equipped or not in the business of providing the kinds of services needed to maximize the Zone's total overall development. Often, this mistake is made because the Grantee is not clear enough or patient enough to develop its own goals and interests and sit down and thoroughly discuss these with its prospective Operator.

If a particular firm cannot provide services to fulfill the full range of goals for the Zone project, the Grantee should make sure that the Operator's Agreement provides it the means to fully develop the Zone project. This could involve a non-exclusive Operator's Agreement or simply a clear delineation of the scope, responsibilities and financial considerations of the Operator's Agreement. If the Operator is not equipped to provide certain services or bear certain responsibilities, the manner in which those services will be provided or those responsibilities will be borne must be addressed. Ignoring or ducking such issues ultimately proves costly to a Zone project's success.

The Operator's Agreement will take into account whether the Grantee will accept multiple Operators. It will address the supervision of Subzones (which commonly act as their own Operators). It may address whether or not the Grantee may act as Operator at certain sites. The Agreement should be a comprehensive document, allowing the Operator a degree of flexibility as well as protecting the Grantee from acts of negligence. It should be prepared with the objective in mind of maximizing the Zone project's trade and economic opportunities, as well as that of protecting the Grantee from direct Customs liability.

The Operator's Agreement defines the responsibilities and liabilities of the parties. It typically specifies exclusivity or non-exclusivity. The Operator's Agreements often provide terms covering the following issues:

  • Term of Contract Responsibilities of Operator
  • Default and termination Assignability
  • Marketing responsibilities Utilization of sub-contractors
  • Administrative expenses Advertising
  • Indemnification Right of entry, inspection, and audit
  • Notices Relationship between Grantee and Operator
  • Bond requirements Recordkeeping and Reporting responsibilities
  • Use of Trade Name Withdrawal of Grant

In selecting an Operator the Grantee must, in addition to its goals, consider its own capabilities. It must also consider the capabilities of the prospective Operator. The newly established Grantee must always keep in mind that its goals and capabilities may change.

It may be that the new Grantee wants to stimulate cargo movement at its facilities, but doesn't have the equipment, infrastructure, -- perhaps, the desire -- to really get into the handling and warehousing business. Yet, a particular warehousing and logistics firm may already be set to handle the extra business that the Zone could stimulate. Hiring the firm as an Operator may be the quick easy answer to getting Zone activity started. In doing this, however, both Grantee and warehousing business must jointly ask themselves a number of questions, such as:

What happens when a new company wants to set up its own distribution operations in the Zone? Will there be assistance from the existing Operator? Will there be conflict? Will there be no relationship between the two; that is, will the Zone have multiple Operators? If that is the case, who will provide expertise and oversight services to ensure compliance?

If the Grantee desires a real estate development firm to operate and develop its Zone project, the questions the Grantee and developer must jointly ask themselves may include:

What kinds of businesses and activities are desired for the Zone? Who finances construction within the Zone? Will the Operator build certain facilities on a speculative basis? If so, how many? How much office space is too much? What kinds of industry are acceptable or desirable? What kinds are not? Who can build facilities in the Zone? Can other developers own facilities? Who will help companies that cannot be accommodated in the General Purpose Zone and need Subzone status? What about existing businesses in the community that need Subzone status?

If the Grantee desires an administrative firm to operate the Zone, the Grantee and administrator must ask themselves:

Will the user base develop quickly and broadly enough to economically support the Zone operation? If not, who subsidizes the Zone operation? When, and how much on-site staffing will be required to efficiently run the Zone as it develops? Can the administrator designate certain users as FTZ operators; that is, can it require users to obtain their own Customs Bonds? What responsibilities will the administrators have in developing and monitoring Subzones?

In any case, the Grantee must ask itself if and how it will recoup its original investment in establishing its Zone project. Whether funds will flow from Operators and/or users must be addressed. Finally, the Grantee must address the terms under which it can terminate or revise the Operator's Agreement in the event the Zone project's goals are not met. Obviously, maximum flexibility within the bounds of fairness should be the goal of the Grantee. The Grantee should never be reticent about asking for and demanding good service from its Operator(s). The Grantee should always position itself to meet the Zone's goals as they develop or change. Ideally, the Zone Operator will be the Grantee's closest ally in making the Zone project a success.

Points to Remember:

  1. The Operator is that party responsible under the Customs FTZ Bond.
  2. Different Operators (as well as different Grantees) often offer different services.
  3. The time to compare goals, interests, and potential conflicts is before an outside Operator is hired.
  4. If you hire an outside Operator, make sure you maintain the flexibility to pursue your Zone's goals as they may change or evolve. Know what your Zone project is about.

A Word to the Wise about the Foreign-Trade Zone Operator's Bond

To activate any Foreign-Trade Zone area, the Operator is required to file a Foreign-Trade Zone Operator's Bond. This is filed using Customs Form 301. The FTZ Operator's Bond is the subject of much fear and trepidation, and no small amount of misunderstanding. It should be noted, that a Foreign-Trade Zone Operator's Bond is NOT a form of insurance coverage. If fines, penalties or liquidated damages are assessed against an Operator's Bond, the surety company underwriting that Bond will make every effort to collect the entire settlement amount from the Operator. The Bond simply provides assurance to the U.S. Customs Service that assessments against the Bond will, indeed, be paid. The Surety Company underwriting the Bond provides this assurance. However, if assessments against the Bond are paid to Customs by the Surety Company, the Surety Company will then take action against the Operator. Normally, the face amount of the Bond is set by the District Director (or Port Director) of Customs and is based on that individual's judgment regarding the level of potential liability. The minimum face amount is $50,000.

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