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June 25, 2018

The future of free zones in the UAE

By the end of the year, foreign business owners will be able to register onshore in the UAE with 100 per cent ownership. How will this change – and others – impact the GCC’s free zone landscape?

The future of free zones in the UAE

When the UAE Cabinet announced in May new rules that will allow 100 per cent foreign ownership of companies without a local partner, one could have been forgiven for immediately thinking about the impact on free zones.

The new investment law – expected to be ready by the end of the year – will mean foreign companies can operate in the country without having to partner with a local entity or giving up a majority share. Instead they will be able to register onshore without relinquishing a single per cent of themselves. A significant perk that had – until now – been the preserve of the nation’s free zones.

The news was coupled with an announcement that 10-year residency visas for specialists in scientific, medical, research and technical fields would also be on offer – a dramatic uplift from the usual two or three year visas.

But despite the news having potential ramifications for free zones, the ownership rules were met with universal praise and positivity by the business community.

Yusuffali MA, chairman and managing director of UAE-based retail giant Lulu Group International, tweeted his overwhelming support of the move, saying: “A landmark announcement, sure to further boost UAE’s image as the most investor friendly economy in the region and 100% foreign ownership is a revolutionary step [that will] generate huge interest among global investors.”

Speaking to Bloomberg Chavan Bhogaita – head of market insights and strategy at First Abu Dhabi Bank – added: “Many people had held back from investing here as they felt there was no long-term tenure and they were dependent on a short-term visa. Now, with a 10-year visa and 100 per cent foreign ownership, investors and people looking to set
up and grow businesses here will have more confidence.”

The focus has certainly been on boosting foreign investment rather than compromising the strength of free zones, and a brief look beyond the headlines backs up the notion that free zones will not be threatened by the new law.

Fore example, the ownership law will be more restricted in scope than many first thought – limited to specific industries deemed essential to the UAE’s economy, according to government officials. A committee led by the Minister of the Economy will be formed to decide on the industries included.

There is also the example of Saudi Arabia from which to draw confidence. As part of its Vision 2030 initiative to diversify its economy away from oil, the kingdom opened up sectors including engineering and education to 100 per cent foreign ownership from late 2017. This alongside the expansion of its free zone landscape.

And whether it’s one of the 45 in the UAE (30 in Dubai), or the many others across the region, each free zone offers much more than ownership benefits to attract investors.

These benefits come in various shapes and sizes – usually tailored to a particular industry or business type – but generally include easier start-up processes, tax breaks, simplified workforce processes, and more.

Economic lynchpins

By creating appealing environments for businesses, free zones have had a major impact on the Gulf’s economic landscape. As an example, Jebel Ali Port and Free Zone, active for more than 40 years, now collectively contribute to more than 20 per cent of Dubai’s gross domestic product (GDP). Jafza has developed into a base for 7,000 businesses from over 100 countries, sustaining more than 150,000 jobs and attracting 32 per cent of the UAE’s foreign direct investment.

Meanwhile, the Dubai Multi Commodities Centre (DMCC) – ranked as the world’s best free zone by the Financial Times’ fDi Magazine for three years in a row – contributes around 10 per cent of GDP, andDubai Airport Freezone Authority contributed 7 per cent to Dubai’s non-oil trade during 2017.

The wider Middle East handles around $552bn worth of exports from its free zones, with the UAE accounting for more than $61bn in 2017 – some 19.5 per cent of the country’s total exports last year.

The numbers are staggering, and highlight the importance of free zones to the region – something Saudi Arabia aims to capitalise on as it seeks to move away from oil-dependency. In October last year, Crown Prince Mohammad bin Salman announced plans to build a $500bn Red Sea economic zone called NEOM – a new 25,900 sq km city that will cross into Egypt and Jordan and operate independently from existing governmental frameworks. It will focus on nine industries: energy and water, mobility, biotech, food, technological and digital sciences, advanced manufacturing, media, and entertainment.

Meanwhile, in Oman, the first phase of a huge expansion of Sohar Port and Freezone got underway in late 2017. The plans aim to grow the industrial and maritime hub by as much as 50 per cent, and form an integral part of the Sohar Port 2040 Master Plan.

According to Shoaib Alrahimi, VP Business Park free zone at Dubai South, the free zone model is vital to the development of the region as it offers an easy ‘in’ for investors.

“Today it’s hard to attract foreign investment as well as encourage domestic investors without the pro-business free zones concept – 100 per cent ownership, 100 per cent tax exemptions, one-window operations, quick approvals procedures, and full repatriation of capital and profits, among others,” he says.

“Every government is keen to improvise its free zone model to attract more investors, as this proven successful business model plays a very positive role in the economic uplift of the country.”

Going one step further, Dr Mohan Guruswamy, chief knowledge officer of the World Free Zones Organisation, argues that the region is performing above the global average in some aspects.

“Free zones in the Middle East are in some sense way ahead of similar entities around the world,” he says.

“We want to stay ahead of the curve and trigger evolution elsewhere. In technology absorption, skill development, benefiting from global value chains, environment protection, and related areas, free zones in the region have performed creditably. Global investors are attracted because of political stability, business-friendly policies, availability of skills, growth prospects, potential for attractive return on investment, and more.

Winds of change

The success and impact of free zones in the months and years ahead may seem assured, but there is no escaping the need to adapt to various changes taking place.

The UAE’s new ownership law is one of these changes, but also playing a role are technology, diversification and competition, among others.

“Technology is a dominating factor in today’s business and it plays a very important role in promoting those free zones that are up to date and well equipped to handle digital transformation through Blockchain, Artificial Intelligence, Internet of Things and deployment of latest communication and informative tools,” says Alrahimi.

“The free zones that lack behind on the technology front have no future.”

It’s a view backed up by Dr Guruswamy, who adds: “Tech foray seeks to create and thrive a new ecosystem which is usually at war with the old or traditional ecosystem. Businesses that operate in the old ecosystem have to develop resilience to withstand the pressures of the new. This is a constant process of evolution.

“Free zones are cognisant of the challenge, and we at World FZO are helping free zones under our umbrella to identify and cope with these challenges.”

In terms of competition, each free zone is facing increasing pressure to out-do existing and incoming rivals. But from a broader perspective, this competition has numerous benefits, and in fact offers a lot of choice
to investors.

“The UAE has 45 free zones, which indicates the concept still has an appealing value for investors. Even small emirates in the UAE are able to register a good number of companies despite competition in the market,” says Alrahimi.

“I have no doubt there is still room for more free zones, and the competition is driving the market forward. More than a dozen free zones are under construction – mainly in the UAE and Saudi Arabia – and they will soon become a reality.”

Dr Guruswarmy adds: “Indeed, in matters such as free zones, it is a case of ‘the more the merrier’. The number of free zones points to potential for business and potential for growth. The large number does not by itself stifle free zones. If free zones fail to evolve, adopt and adapt, they may falter.

“In reality, the large number of free zones and competition among them is actually driving the market forward, deepening and widening the market size.”

Also widening the market is diversification – a keyword in today’s post-oil economy and a cornerstone of Saudi’s Vision 2030, the UAE’s Vision 2021, Oman’s Vision 2020, Kuwait’s Vision 2035, and Bahrain’s Vision 2030.

Being able to expand a free zone’s offering, opportunities and potential is a boon in such a competitive environment.

A good example of the success of diversification comes in the form of Jafza’s parent organisation DP World. By expanding its horizons – almost literally – the Dubai-based global trade enabler now has an empire that stretches to 40 countries and 78 marine and inland terminals – which can only be beneficial to Jafza itself.

“We continue to grow complementary sectors in the global supply chain such as industrial parks, free zones and logistics adding further value to our stakeholders,” said DP World group chairman and CEO HE Sultan Ahmed bin Sulayem in a statement in March.

“Successfully setting up these new streams across our network and in new locations will be a major focus in 2018,” he added.

Collaborative future

The importance of diversification is matched by the importance of partnership – a key component of free zone success that has never been overlooked, but is taking on a heightened role today.

One example is the memorandum of understanding (MoU) signed between the Dubai’s Department of Economic Development and the Dubai Free Zones Council in April this year.

The MoU is designed to facilitate business operations for free zone based companies, and the collaboration aims to enhance Dubai’s reputation as a leading hub for attraction businesses to the region.

“Through this agreement, we aim to streamline licensing procedues for businesses operating in the free zones, thereby strengthening Dubai’s position as a preferred investment destination,” said Sami Al Qamzi, director general of DED, at the signing ceremony.

“Together with the DFZ Council we will work towards enhancing the role and contribution of free zones in Dubai in national economic growth, and elevating productivity in Dubai to the highest level.”

For Dr Guruswamy, the need for organisations to work together has reached a critical point.

“We believe it is no more a matter of choice; it is a necessity,” he argues. “Free zones around the world have
to work together under broad, common, globally relevant guidelines, but follow regionally differentiated strategies to stay ahead.

“As the global apex body for free zones, we at World FZO are constantly pursuing the goal of bringing all free zones around the world under one common platform, so as to make it a win-win for all.”

To boost the chances of success in the future, the World FZO launched an ambitious initiative in 2016: The Free Zone of the Future Programme – A Global Initiative for Local Prosperity.

Designed to help make free zones ‘future ready’, the programme seeks to “collectively address future challenges and enable learning through knowledge sharing”, according to Dr Guruswarmy.

On top of this, the World FZO launched another new initiative in April this year – the Izdihar Index (translated to Prosperity Index).

This index will benchmark business excellence, economic contribution and a number of certifications as a contributory factor to prosperity for the world at large.

“The attempt is to rate free zones around the world in terms of their contribution to prosperity and thereby enhance the credibility and attractiveness of free zones as an enlightened economic idea,” explains Dr Guruswarmy.

And no doubt, collaboration, partnership and broad unity will be a vital part in highlighting that attractiveness.

Another major confidence boost for UAE free zones, which also relies on the strength of collaboration, is the 2030 Dubai Industrial Strategy. Launched in 2016, the strategy aims to generate an extra $44bn for the emirate’s economy, and is being led by Jafza, Dubai Industrial Park and the Dubai government.

At the time of launch, Jafza’s deputy CEO and chief commercial officer Ibrahim Mohamed Aljanahi, said that the strategy seeks to enhance the sustainability of Dubai’s industrial sector and its free zones – helping to reduce its dependence on imports and foreign trade.

It all amounts to a clear conclusion; that free zones in the UAE and across the GCC are still viewed as vital for the region’s growth.

In a post-oil era, where investment and diversification are key, free zones remain an essential part of the GCC’s future development; and while the UAE’s new ownership law widens options for incoming investors, it’s simply another string to the country’s bow as it moves into a new phase of growth.