Freeing up growth: Increasing the number of free zones to boost investment potential

Free zones have been a central part of Ras Al Khaimah’s recent economic success. Growth has been the result of government policies actively targeting industries and manufacturers that can build on the emirate’s natural resources, offering them the incentive of a low- or no-tax business operating environment. Free zones are a crucial element of the government’s economic growth and diversification strategy, and RAK has developed several areas with distinct features aimed at attracting different types of foreign investment. What they have in common is a tax-free operating environment for tenants.

Incentives

As is the situation with free zones worldwide, RAK’s are an ideal fit for export-oriented investors. The emirate is also home to thousands of companies that have chosen to locate outside of the free zones. Typically these are firms that see the countries of the GCC as their target markets. Thanks to the free trade protocols of the regional bloc, products shipped from RAK to anywhere else on the Arabian Peninsula, save for Yemen, are exempt from import duties. Those exporting beyond the region typically choose to locate in a free zone because of the exemption on offer from the UAE 5% tax on imports. Manufacturers in the zones can bring in their equipment, parts and other supplies without that additional cost. They can also own 100% of their business, whereas outside the zones local ownership of at least 51% is required.

Categorised By Type

The largest free zone in terms of number of companies licensed is the RAK Free Trade Zone (FTZ), which as of April 2013 was home to about 7000 firms in its specialised industrial or technology parks, including services and consulting companies. Licensing costs between Dh3650 ($994) and Dh15,000 ($4083) a year, according to free zone officials, depending on the activity. A commercial licence costing Dh3650 ($994) allows for import-export activity, distribution and warehousing, with the scope limited to two different activities or seven similar ones. Upgrading to a general licence, at the top end of the cost spectrum, allows for an unlimited scope of the same activities. An industrial licence, for manufacturing, processing, assembly and packaging, costs Dh5000 ($1361). The broadest category is the consulting and service licence, which allows for services, such as management, marketing, logistics, consulting and real estate services. Each licence allows for two business lines, with additional services requiring another licence.

In RAK FTZ’s mix of tenants, 62% are licensed in commercial activity, 27% in consulting and services, 9% in trading and 1% in industry. To market its services, RAK FTZ has taken the unusual step of establishing foreign offices, noted Cleo Eleazar, public relations and media officer at RAK FTZ. Outreach offices are in India, Germany, Turkey, the UK and US.

RAK FTZ has also aimed to create an environment for a wide variety of businesses to expand and diversify economic activity. For example, the growth of educational services at RAK FTZ has prompted the authorities to create the Academy Zone, a facility dedicated to academic programmes. Education has been identified in the emirate as a growth area, and currently there are 14 educational institutions. Licensing costs range from Dh7500 ($2042) for a distance learning office to Dh100,000 ($27,220) for a university or an academic infrastructure provider.

Industrial Estates

The RAK Investment Authority (RAKIA) was set up in 2005 and operates two free zones. The 22m-sq-metre Al Ghail estate is inland and away from population centres, whereas Al Hamra, at 4.8m sq metres, is located within the area of RAK known by the same name, and is developing as both an industrial hub and as a high-end destination for residences, shopping and hotels.

“A strategic aim of the emirate is to attract big company names that will in turn increase the confidence of potential future investors,” Peter Michael Schuster, the general manager at RAKIA, told OBG.

RAK Maritime City, which opened in May 2011, covers 8m sq metres of coastal industrial area, and was undergoing further development as of early 2013. Plans call for the emirate’s fifth port, with deepwater berths and private jetties. The authorities envision free zone tenant groups by activity, including retail, warehousing, cargo handling, industry and manufacturing, tank storage, and shipbuilding and repairs. Maritime City will offer a range of licensed and corporate structures as well.

Differentiating

As of early 2013, RAK FTZ and RAKIA were transitioning leadership teams and preparing for a new phase. One of the main shifts is a higher degree of differentiation between the free zones on offer. As such, RAKIA’s zones are expected to increase their focus on industrial activity, and RAK FTZ’s on non-industrial sectors. The idea is that further specialisation will allow both to better target potential customers and serve existing tenants.

Growth will likely depend on the emirate’s success in enhancing the operating environment. The chief constraint as of 2013 was access to electricity. According to UAE federal law, the Federal Electricity and Water Authority (FEWA) is responsible for providing these services to RAK residents. Until recently it has also been supplying power and potable water to industries, retail outlets, offices and other commercial ventures as well, but with demand rising across the country, meeting supply levels for all industrial customers is proving to be a challenge. Expansion thus depends on the emirate’s ability to develop its own domestic capacity. Power and water are now available from two sources. RAKIA has built two electricity plants, one each for its two free zones, and a private utility, Utico, is providing power and water to customers in the emirate. Both suppliers are planning to expand capacity.

What shape the power and water sector will take is still an open question. RAK has established its own regulator, the RAK Electricity and Water Authority (RAKEWA), and as of early 2013 the body was just forming. The emirate has also brought in Tata Power, part of the Indian conglomerate Tata Group, to perform a demand study and a 10-year forecast on which the emirate could base future decision-making. As of now, locally owned assets include RAKIA’s two plants and a transmission line running between them and Utico’s facilities.

The future may see RAKIA sell off its assets to a manager such as Tata Power. Independent power plants and independent water and power plants are also likely to be part of the energy mix. Utico has plans for adding capacity, including the GCC region’s first coal-fired plant that would capture carbon dioxide emissions, making it an environmentally friendly facility (see Energy chapter).

Transport

RAK is also seeking to address infrastructure gaps in transportation. Manufacturers both in the free zones and outside typically use Dubai’s Jebel Ali port for shipping. The port is roughly an hour away by road, but an option in RAK could prove popular. RAK has five ports at present, though none are configured for container shipping. RAKIA officials told OBG it is engaged in a study to determine how many local firms would support the creation of container shipping facilities within the emirate.

Within RAKIA’s zones, customer feedback has focused on issues such as the lack of pavements and working street lights. Improvements to public transport are also a common request. RAKIA’s zones are found in Al Hamra, about a 30-minute drive from RAK’s central city area, Nakheel, and in Al Ghail further away inland. While the RAK Transportation Authority has established a public bus system within the city, the service still needs to iron out some early teething problems. At present it does not reach all areas of the city, with a limited number of bus stops and an unclear bus schedule cited as key factors in low passenger numbers, according to a report in local English daily, The National, in late 2012.

Officials running the free zones may also consider new stipulations to assuage concerns about a federal plan to impose corporate taxes. Presently, the only corporations paying taxes in the UAE are foreign oil companies and banks, although each emirate reserves the right to establish its own local tax regime. A plan was announced in March 2012 to consider implementing taxes in the future, according to the IMF, and discussions have continued since then, RAK officials told OBG. Details or a timeline were not available, but as of March 2012 any possible implementation was considered unlikely before 2014. Licences by sector, 2012