By Christopher Sell
In its continuing bid to become the benchmark of ‘21st Century Arabia’, the UAE has always been active in attracting foreign firms to set up shop in the country.
Christopher Sell reports on the growth of free zones across the Emirates and the wider region and finds out why they are so popular.
From the early pearl traders in the 18th century, Dubai has always been synonymous with trade and commerce, exploiting its geographical location to conduct business throughout the Gulf. It is little wonder that, in the hunt for foreign investment, governments in the region are increasingly using tax and restriction-free havens blessed with first-rate facilities to encourage overseas firms. Over the last 20 years an increasing number of businesses have prospered from the rapidly expanding reach of the region’s free zone net.
And with free zones becoming established throughout the UAE, more businesses – not just from the Middle East region – are looking to get in on the action of rising profits on the back of numerous incentives offered by the region’s free zone sites.
A visit to last month’s Big 5 exhibition proved ample evidence of this growth. Nestled between halls six, seven and eight stood a plethora of stands all advertising their respective free zone, offering the business equivalent of a foot-up.
Wherever you looked was another emirate offering their wares: Sharjah Airport International Free Zone, Hamriyah Free Zone, Fujairah Free Zone, Ras Al Khaimah Free Zone, Dubai Airport Free Zone Authority or Jebel Ali Free Zone (JAFZA).
Launched in 1985, JAFZA covers 303ha of land, incorporating one of the biggest man-made ports in the world and housing companies from over 120 countries. Of JAFZA’s international tenants, which include Sony, Nokia and Gap, 39% are from the Middle East, 20% are from Europe, 29.4% Asia and 7.15% from the Americas. The free zone, which sees an average of 15 new companies register every month, amassed US $18.7 billion (AED69.7 billion) through imports in 2004 and $14.3 billion via exports and re-exports in the same year.
The advantages of setting up in JAFZA include a lack of import and re-export duty, zero corporate taxes for a 50-year renewable period and the permission of 100% foreign ownership of a company, as opposed to UAE regulations where at least 51% of a company must be owned by a UAE national.
Milad Jabbour, CEO of Genius Computer Technology explains the rationale behind moving his business to JAFZA. “Moving to the free zone is the best thing I have done in terms of my business, getting a good return on my investment, my resources and in terms of logistics,” he says.
“It’s very cost effective here, and moving into the free zone from the city centre (of Dubai) will mean I’ll save around $100,000 a year, and eventually the property I’ve been allowed to build here can be sold for around $1 million.
“The free zone will give us more of a chance to invest in different market sectors – in fact, we recently arranged a joint venture with an American company in the telecoms sector as a result of moving to JAFZA – so by being here the company will grow,” he adds.
Other free zones within the UAE offer varying facilities, with the capacity and set-up changing to varying degrees. Sharjah claims to be the ‘undisputed’ commercial nerve centre of the UAE, accounting for more than 48% of the country’s industrial GDP. Sharjah Industrial Airport is home to the largest air-cargo hub in the Middle East and Africa, connecting 230 destinations worldwide. Lufthansa operates its second largest cargo hub, after Frankfurt, out of Sharjah International Airport with 360 flights and more than 48,000 tonnes of cargo movement per month. Adjacent to Sharjah International Airport and a few minutes from Sharjah City, Dubai and major UAE ports on the Arabian Gulf, the SAIF-Zone is just 120km from Port Khorfakkan on the Indian Ocean. Investors therefore have access to the East and West Coast.
It is unsurprising therefore, that since 1995, when 55 companies were registered, SAIF-Zone has attracted 2,278 companies, from 91 countries. Of these 220 are in aviation, 332 industrial manufacturing, 707 services and the remaining 1,478 engaged in trading.
Encompassing around 10,000 companies employing over 150,000 people, there are currently 20 free zones in the UAE. As the country acts as a catalyst for the Middle East’s growth as an international business player, the successes of free zones are vital in attracting more multinational companies to set-up shop in the region.
Ali Ibrahim, deputy director general for executive affairs at the department of economic development in Dubai, explains: “The free zones play an important role in the economic development of the Emirates. Due to the unique facilities available a huge number of foreign investors, which are increasing on an annual basis, have set up in the free zones and this has played a key role in the rapid economic growth of the UAE.”
The use of free zones is also extending north into Europe. Last month, Romania’s Minister of Economy and Commerce, Ioan Codrut Seres, met Sultan Ahmed Bin Sulayem, chairman of Dubai World – which is operating the Port of Constanta – seeking diversified investments from the Dubai-based holding company. Seres said that he is keen for Romania to take similar steps to Dubai in initiating free zones to generate foreign investment.
Unsurprisingly, other countries have begun to recognise the economic benefits of foreign investment. In recent years the Qatar government has diversified an economy heavily reliant on the energy sector by setting up two free zones. The Qatar Financial Centre and Qatar Science Park (QSTP), which opened in September 2005, will soon be accompanied by a free zone at the new Doha airport. In September this year, QSTP announced two venture-capital funds totalling $130 million, which will take Qatar a step closer to its goal of becoming one of the world’s most attractive locations for start-up technology companies. They will be managed by a consortium of Oxford Capital Partners, a UK based venture capital firm focused on emerging science and technology, Qatar National Bank and The Ansbacher Group, a subsidiary of QNB which provides tailored financial solutions to high-net worth and institutional clients worldwide.
And it is not just the UAE and Qatar. Since 1999, Kuwait has been providing tenants of the 1.5 million m2 Kuwait free trade zone, located at the 3.2 million m2 Shuwaikh port, with tax-free foreign corporate income and zero import duty. In Bahrain, where foreign direct investment averaged $1.7 million each year from 2002 to 2004, the Mina Sulman free zone provides a free transit zone for duty free imports of equipment and machinery.
Iraq too, will eventually host its own free zone, using it as a much needed financial crutch to help kick-start its economy.
Currently, Iraq loses more than $500,000 daily as ports south of the country cannot handle sea-born imports and exports. Most goods have to be imported through neighbouring countries such as Jordan, Lebanon and Kuwait. The Khor Al-Zubair Private Free Zone Project, established by a German consortium, will develop a 5 million m2 free zone incorporating loading and storage facilities and access to the port.
The hope is that Iraq will be able to join other Middle Eastern economies and international companies in tapping into the region’s growing list of business beneficial free zones.
“Moving to the free zone is the best thing I have done in terms of my business, getting a good return on my investment, my resources and in terms of logistics. Its very cost effective here ... I’ll save around $100,000 a year.”