New goals in sight: Encouraging foreign investment in a range of areas

To drive economic growth and stimulate industry development, Ras Al Khaimah has long pursued a strategy of promoting outside investment. Over the past 20 years, this has proved very successful, and the emirate has developed a fairly broad range of industries, led initially by cement and ceramics factories processing local limestone. The pace of growth accelerated during the UAE’s oil and real estate boom of the past decade, which provided particular stimulus to RAK’s cement firms and other industries linked to real estate. Unlike many other Gulf economies, RAK is relatively well diversified, which enabled it to come through the economic downturn mostly unscathed. The industrial base is built around export-oriented manufacturing across a range of sectors, and was largely able to make up for lost demand in the UAE by increasing exports.

FACILITATING NEW BUSINESS: RAK is looking to develop its economy further to become a centre for advanced manufacturing and high-tech industries, as well as expanding service sectors, such as tourism, retail and offshore financial services, and has identified increasing foreign investment as key to achieving this. RAK attracts investment through operating a low-bureaucracy, responsive environment for investors. The emirate levies no taxes and operates a number of free zones where investors are free from restrictions on repatriation of capital and profits and exchange controls. In addition to this, RAK benefits from a lower cost of living relative to the UAE’s principal cities of Abu Dhabi and Dubai. This means companies based in RAK are able to benefit from lower operating expenses and that skilled expatriates can afford a higher standard of living than that which would be available elsewhere.

RAK is also taking steps to help local companies obtain financing. “To further facilitate the ease of doing business for new investors looking to establish in RAK, we have signed cooperation agreements with a number of financial institutions that provide funding for small and medium-sized enterprises. It is essential to have appropriate financing mechanisms geared for start-ups and smaller businesses,” Khater Massaad, CEO of the RAK Investment Authority (RAKIA), told OBG.

Moreover, RAK imposes few regulations as to the mandatory employment of nationals, which can constitute a significant cost in terms of training and productivity elsewhere in the Gulf. Much public spending on services is met at the federal level, meaning the government does not suffer from onerous financial responsibilities and is able to run a prudent fiscal policy which aims to generate a financial surplus each year.

GOVERNMENT APPROACH: Part of the way the emirate meets its expenses in the absence of taxes is through equity participation in profitable industrial and other development projects, resulting in a business-oriented government and cheaper finance for selected projects. RAK was awarded an “A” rating by the major ratings agencies in 2008, which allows it to borrow more cheaply for selected capital projects. The RAK Investment and Development Office acts as the government’s corporate finance arm and coordinates investment strategy. A number of concerns originally set up by the government are now listed on local bourses (although the government often retains a stake), and several have the potential to act as seeds for attracting further investment.

MARKETING EFFORTS: According to figures from the Department of Economic Development, the bulk of investment in industry in 2010 came from local sources, some 76%, followed by the GCC (17%) and foreign investors (7%). However, the emirate has stepped up its marketing and branding campaign in recent months, looking to raise its profile and diversify away from its traditional sources of foreign investment, which historically have been India, Pakistan and the UK, along with other Gulf countries. RAK recognises the benefits of foreign direct investment, such as transfer of technology and managerial skills, and is keen to attract more foreign firms. The emirate is also looking to promote investment in sectors other than manufacturing, as it seeks to diversify its economic base.

Currently, India is the leading foreign investor in both RAK Free Trade Zone and RAK Industrial Zone, the industrial estate arm of RAKIA, in each case accounting for just under 30% all firms working in these zones, and RAK is likely over the near term to continue to be attractive to investors from the Indian subcontinent. As part of the UAE, RAK enjoys political stability and high standards of infrastructure. Taken together with the incentives on offer in the free zones, strict transparency and anti-money laundering compliance measures in the emirate, and its geographical proximity, RAK is in a position to appeal to Indian and Pakistani firms looking to expand abroad. RAKIA has also considered using its expertise to set up a free zone in Georgia, and while the project has been put on hold relations between the two countries remain cordial. RAK has exchanged trade delegations with South Africa, Australia, Canada and the US in recent years, and also enjoys close economic ties with Switzerland.

TOURISM, RETAIL & FINANCE: In addition to industrial ventures, RAK is increasingly attractive for investors in the tourism sector. Several global hotel chains have entered the local market in recent years, including the US’s Hilton, Saudi Arabia’s Rotana and Singapore’s Banyan Tree, which all opened resorts in 2009.

The emirate is developing a number of mixed-use real estate developments, many of which involve a combination of hotels, retail outlets and leisure facilities, as well as residential units. The number of international and regional brands is slowly rising, from hypermarkets such as Carrefour, which recently opened its second store in the emirate, to vendors of apparel and higher-end goods. The increase in tourist numbers is expected to support this trend.

In addition to real estate and tourism, RAK is looking to position itself as an offshore financial centre, with a dedicated division of RAKIA, RAK Offshore, set up to deal with offshore companies. These benefit from the usual free zone incentives on offer, as well as strong regulations to combat money laundering and taxation treaties with more than 60 jurisdictions. To date, over 6000 offshore firms are registered in RAK.

INVESTING IN INFRASTRUCTURE: The emirate is continuing to invest in infrastructure to further improve its connectivity and promote further growth. RAK began a road improvement programme in 2008, allocating some Dh3bn ($816.6m) of investment over five years, while the Etihad Railway, a federal project to link up all emirates in the UAE by rail, is due to commence in 2013 and be completed by 2017. RAK has its own airport as well, which is currently served by six regular carriers and 25 charter airlines, although there are significant plans for expansion in the years ahead, including increasing the number of gates and developing a dedicated charter terminal.

RAK’s model for economic growth is to rely on private, not state, investment. This approach has already borne fruit, and the scale of investment is likely to grow.