One more first: Positive ratings could cut Sharjah’s borrowing costs

Adding to an already impressive list of firsts, Dubai’s neighbouring emirate of Sharjah added its first sovereign ratings at the beginning of 2014. Moody’s and Standard & Poor’s (S&P) both place the UAE’s third-largest emirate well inside investment grade. Away from the glare of publicity, Sharjah was home to the first airport in the Gulf, which was opened in 1932. The airport served as a stop-off point for flights from the UK to India, the first container terminal in the region, built at Port Khalid in 1975, and the home of the area’s first low-cost carrier when Air Arabia established its headquarters in the emirate in 2003.

DIVERSIFIED: Sharjah has also quietly developed into the most diversified economy in the area, with no sector contributing more than 20% to a GDP that shows strong growth and totalled Dh89bn ($24.2bn) in 2012, with full-year figures for 2013 expected to be in excess of Dh100bn ($27bn). Alongside establishing itself over the past 30 years as the UAE’s heartland of manufacturing and industry, Sharjah’s cultural assets are beginning to be displayed. It has been designated Capital of Islamic Culture in 2014 and Capital of Arab Tourism for 2015.

RATINGS: Moody’s credit ratings agency has given its fourth-highest, long-term rating of “A3” to Sharjah, and S&P has allotted an “A” rating, its third-highest. Both assign a stable outlook. The ratings firmly place the emirate in investment-grade territory by emphasising its ability to meet its financial obligations. Sharjah Finance Department’s director-general, Waleed Al Sayegh, told local press that the new ratings indicated the emirate was “a modern, open state, managing its finances in line with international best practice” and would help “open Sharjah up to new investors and give confidence to existing ones”. Moody’s said its assessment was based on Sharjah’s strong government finances. The average fiscal deficits since 2008 have been 1-2% of GDP. Public debt in 2012 was 6% of GDP. S&P said that it did not expect that to go any higher than 10% in 2014.

GROWTH: Sharjah has been industrialising and diversifying since the 1980s, adopting policies that give it the enviable statistic that no individual sector represents more than one-fifth of the economy. Major sectors include mining, construction, finance, transport and telecoms. The Finance Department claims that this makes Sharjah one of the most diversified economies in the GCC region. Between 2002 and 2009 GDP grew at a compound annual growth rate (CAGR) of 13.3%. Even immediately after the financial crisis, the economy continued to expand, from Dh50bn ($13.6bn) in 2009 to the Dh89bn ($24.2bn) of 2012, mostly driven by the emirate’s 45,000 small and medium-sized enterprises.

Sharjah Investment and Development Authority (Shurooq) is pivotal in promoting the policy of growth while maintaining diversification. Assets such as a 92% literacy rate and higher education institutions like the American University of Sharjah have helped to create a qualified and well-educated labour force for the incoming businesses.

In turn, the establishment of a strong industrial base and manufacturing sector is aided by continual expansion in the number of companies operating in the sector, which have been growing at a CAGR of up to 10%, accounting for more than a third of the manufacturing establishment within the UAE.

TRANSPORT: Sharjah’s geographic position as the only emirate with strategically located ports on both sides of the Strait of Hormuz has made it a thriving business hub. Three deepwater ports, Port Khalid, Khorfakkan and Hamriyah, between them cover nearly 50m sq metres. Hamriyah is the only port specialising in bulk and heavy cargo in the vicinity of a free zone. Sharjah International Airport, long-since relocated from its original 1932 site to a position closer to the city, handles more than 500,000 tonnes of cargo per year, and the rail network under construction in the UAE will run from the Ruwais oil and chemicals centre in Abu Dhabi’s western region, Al Gharbia, through Sharjah to the northern emirate of Fujairah. The line is part of a much larger rail system joining up the countries of the GCC.

FREE ZONES: The two free zones developed to meet international specifications are at Sharjah International Airport and Hamriyah. In common with counterparts elsewhere, the zones offer specific tax advantages to companies locating there. They allow 100% foreign ownership, as well as exemptions from import and export duties, income tax and commercial levies. Sharjah boasts industrial investment costs that are 35% lower than in other emirates. The lifting of liability to taxes and fees is supplemented by a heavy subsidy on utility costs. The government of Sharjah pays 70% of the real cost of the energy, water and electricity consumed in the free zones. The airport zone is devoted mainly to light industry, while Hamriyah, the second-largest free zone in the country, is home to heavy industry.

WASTE RECYCLING: This level of industrial growth has inevitably produced large amounts of waste. Yet Sharjah has been showing its greener side since December 2007, when the municipal authority launched a campaign entitled “My Emirate is Clean”. The initiative was designed to raise local awareness of environmental issues and improve conservation standards. It also represented an opportunity for forward-looking, environmentally aware investors.

Najib Faris, chief commercial officer for Bee’ah, a leading environment management company, told local press in 2013 that around 60% of the emirate’s waste was recovered. The government’s recognition of the importance of controlling waste led to the establishment of Al Saj’ah, one of the biggest waste management plants in the world. The quantity of waste produced also creates the ideal market for environmental technologies, services and equipment, as well as green technology and innovation.

“The idea of proper waste management is very new in the Gulf,” Faris said, according to the press report. However, he said the concept was gaining popularity, particularly in the UAE.

Bee’ah, a public-private partnership (PPP) formed in 2007, despatched members of its staff to households in Sharjah more than two years ago to explain how to use recycling bins.

This was followed up with the delivery to most offices and villas – as well as many high-rise residential buildings – of recycling bins. “Today we have approximately 80% accuracy in recycling in pedestrian bins, and that is impressive,” Faris said. “People have started realising that it is easy to recycle.” Bee’ah aims to recycle 67% of its waste by 2015. The rest that cannot be recycled will be treated in a “waste-to-energy” plant. The 2015 Zero Waste Plan also includes organic composting and metal recycling.

UNDER CONTROL: One principle of the clean-up is to avoid pollution and further waste creation in the process. Thus, as well as using electric vehicles, Bee’ah powers other vehicles with low-sulphur diesel, which helps reduce emissions without lowering performance. It also has a novel way of cleaning up lagoons. The region’s first solar-powered cleaning boats are used on the Mamzar and Khaled Lagoons in Sharjah to remove floating waste. The boats are powered through a solar roof to run the pod-propulsion system and the waste is stored in a container on board, then taken for processing and recycling.

Khaled Al Huraimel, the group CEO of Bee’ah, told OBG, “There is high demand in the UAE right now for foreign expertise in environmental management in areas ranging from consulting services to recycling to waste management.”

Al Huraimel later announced at a waste management conference that the company had set up an office in Saudi Arabia to capitalise on the methods it had pioneered in Sharjah. “Saudi Arabia is an ideal starting point in our regional expansion strategy due to the kingdom’s similarities to Sharjah in terms of demographics and the nature of waste,” he said.

“According to our estimates, each person in Saudi Arabia generates around 1.3 kg of solid waste every day. With a population of 29.8m, this means 36.7m tonnes of waste daily.”

Bee’ah had 30 employees in 2009. Today, they number 2000. Apart from exporting its expertise to countries such as Saudi Arabia, the company is now looking to move into areas like air and water quality. The waste-to-energy power plants due to come on-line in 2015 will be used to provide power for Bee’ah’s own facility, with any excess sold to the Sharjah Electricity and Water Authority.

Al Huraimel has in mind to attract other foreign companies to get involved, including environmental consulting companies and plastics recycling businesses. “Structuring a new business around a PPP model in the UAE can facilitate early stage growth and help companies expand very quickly,” he told OBG. “Waste management is one of the more acute environmental issues in the UAE, but other areas, such as air and water quality, require equal attention.”