Dubai's private sector to benefit from increased spending on infrastructure

While government-related entities (GREs) play an important role in the economy, Dubai has one of the most dynamic private sectors in the Gulf. A diversified activity base and attractive business environment have drawn in high levels of foreign direct investment. Private firms are particularly dominant in the small and medium-sized enterprise (SME) segment, which accounts for a large portion of the economy, but large private conglomerates are active in the emirate as well.

Various indicators suggest the private sector is currently growing faster than the public-owned element of the economy. Moreover, after experiencing some slowdown in the wake of the 2014-15 oil price slump, private firms appear optimistic that growth will pick up further, bolstered by factors such as stepped-up government infrastructure spending and opportunities from initiatives like public-private partnerships (PPPs).

Two Economies

In current prices, public administration, defence and compulsory social security accounted for 6.1% of GDP in 2016, according to figures from the Dubai Statistics Centre (DSC). Private firms do not account for all remaining activity, however, as public-owned companies and other GREs play a significant role in the economy. Examples include government-owned Dubai World, which owns ports operator DP World and property developer Nakheel, among other firms. The emirate’s sovereign wealth fund, the Investment Corporation of Dubai, is also the majority-owner of Dubai’s largest bank, Emirates NBD, and holds stakes in several other financial institutions, as well as full ownership of national flag carrier Emirates Airlines. Major private sector firms in Dubai, such as property developer Emaar, of which the chairman is Mohamed Alabbar, also have government involvement; however, the Investment Corporation of Dubai has a minority 29% stake in the firm.

As a consequence of the government’s large business holdings, the private sector is disproportionately dominated by SMEs, which already account for the overwhelming majority of companies active in the emirate, as well as for a large share of GDP (see analysis). In its July 2017 Article IV Consultation on the UAE, the IMF highlighted successful implementation of the bankruptcy law and improved SME access to credit among factors that could lead to increased private sector growth. Others include controlling civil service wages and recruitment, boosting entrepreneurship and increasing female participation in the labour force.

The largest contributor to the emirate’s economy is wholesale and retail trade, which is dominated by private companies. These activities accounted for 25.4% of Dubai’s GDP in 2016, an increase of 1.3% in real terms on the previous year. The fastest-growing segment of private sector-dominated activity for the year was accommodation services, which expanded by 10.6% in real terms and accounted for 4.5% of emirate-level GDP at current prices.

Private Sector Growth

Growth from private business outpaced the expansion of public administration, defence and compulsory social security in 2016, which increased by 0.8%, compared to an overall real GDP growth rate of 2.85%, according to DSC data. While figures include some activity by publicly owned companies and GREs, other sources show similar levels of growth for the private sector alone. For example, bank lending to private business and industry across the UAE increased by 2.7% in the 12 months leading up to June 2017 to Dh728.6bn ($198.3bn), according to the Central Bank of the UAE, or half of total domestic lending of Dh1465.9bn ($399bn).

While the dirham figure has risen since 2013, the annual growth rate for business and industrial lending has eased as a result of the oil price slide and reduced bank willingness to lend to SMEs (see Banking chapter). Nonetheless, private business growth outpaced domestic credit growth, which stood at 2.1%. Lending to the government rose by 5.5% in the year to June 2017, but this was offset by a 4.8% fall in credit to GREs.

Positive Trend

Private sector economic development remains positive, particularly in comparison to recent years, suggesting that the privately owned economy is beginning to recover from the knock-on effects of the oil price dip in 2014 and 2015. The Emirates NBD Dubai Economy Tracker Index – an indicator following activity in the non-oil private sector – hit a two-year high in April 2017 of 57.7; any score above 50 indicates positive growth.

The indicator has fallen back slightly since then, but remained in strong positive territory in November at 55.3, down from 55.6 the previous month. By sector, the index for wholesale and retail trade eased slightly to 57.5 after October’s record high of 60 (tracking began in March 2015), the construction industry index was 59.7 (higher than the third quarter of 2017), and the travel and tourism index recorded 52.

Contracting Opportunities

One of the principle drivers of private sector growth in the coming years will be increased government spending, in particular on large-scale infrastructure projects ahead of Expo 2020. The 2017 Dubai government budget, released in late 2016, included a 27% hike in spending on infrastructure, which accounted for 17% of anticipated emirate outlays for the year. The remaining years in the run-up to the exhibition are also likely to see stepped-up investment in infrastructure, supported by increased government revenue derived from the introduction of a 5% value-added tax (VAT) in 2018 and the authorities’ willingness to run small fiscal deficits, facilitated by current low levels of central government debt (see analysis). Such increased spending should provide for improved contracting opportunities, spreading cash flows throughout the private economy.

Major projects under way include the expansion of the Dubai Metro and the development of new phases of the emirate’s second airport, Al Maktoum International Airport. The facility opened in 2013 and a first expansion phase was due to begin in 2017, but has been delayed until 2018. Local authorities said they have secured $3bn to expand the facility and its sister airport, Dubai International. In mid-September 2017 the government approved a Dh1.3bn ($353.9m) contract for the construction of a rain and groundwater drainage system around the airport and the Expo 2020 site, covering 400 sq km. The project, when completed, will be followed by a second phase of works to bring the total project cost to Dh2.5bn ($680.5m).

The metro expansion, meanwhile, involves the construction of 15 km of new track on the system’s Red Line, which will be extended to the Expo 2020 site. The additional track is expected to be operational in May 2020, five months before the exhibition. A Dh10.6bn ($2.9bn) contract for the project was awarded in June 2016 to the Expolink consortium, which is led by French railway specialist Alstom, and includes companies Gülermak of Turkey and Acciona of Spain.

Public-Private Partnerships

PPPs represent a growing opportunity for private sector firms. In September 2015 the emirate adopted a new law on the partnerships, which had previously been limited to independent water and power projects. The legislation allows for a variety of PPP and private finance project models, including build-operate-transfer and build-own-operate-transfer schemes, with terms of up to 30 years – or longer if approved by the Dubai government’s Supreme Fiscal Committee.

To encourage innovation, the law allows private firms to approach government agencies to suggest PPPs, rather than requiring them to simply respond to publicly issued tenders. The law also decentralises decision-making on smaller projects, allowing government agencies to make decisions on projects worth less than Dh200m ($54.4m) and allowing the Department of Finance to do so on those worth less than Dh500m ($136.1m). Projects valued above the limits must be approved by the Supreme Fiscal Committee.

In a July 2017 report by the IMF, the organisation praised the law as containing “several elements of good international practices” – although it also offered suggestions for improvement, such as guidelines for the renegotiation of PPPs once they are in place.